MARKET WATCH: Oil prices continue to tumble
Sam Fletcher
Senior Writer
HOUSTON, Oct. 10 -- Oil prices continued to tumble Oct. 9, pulled down by a loss of more than 20% in equity markets over the last seven trading sessions, as the Organization of Petroleum Exporting Countries called an emergency meeting Nov. 18 in Vienna to discuss a possible reduction in crude output to shore up prices.
Olivier Jakob at Petromatrix, Zug, Switzerland, noted, "The volatility on equities is currently higher than on crude oil, and the stock markets remain the greater input into the current flat price fluctuations on West Texas Intermediate. There is blood on the street, and the stampede continues with equities currently in a self-perpetuating corrective cycle linked to the higher volatility. The sentiment is driven by the main equity indices, but most of them (such as the Dow Jones Industrial Average) have too few companies making the Index. As the result of the historically high volatility, the attack on just one company will bring the whole index sharply lower and then panic selling comes in."
As a result, Jakob said, "The commodity indices should be under liquidation pressure today and will bring their year-to-date returns under further pressure. As cash repatriation continues, the dollar index is well supported, which in turn is also playing against commodities."
In the Houston office of Raymond James & Associates Inc., analysts said, "The Dow has already fallen 1,376 points this week, reaching 5-year lows, and oil is trading below its 12-month low of $85/bbl." Despite OPEC's pending meeting, they said, "Many analysts worry that the demand destruction of a global recession, or even depression, will outweigh any efforts to prop up prices."
Jakob said, "The question is not really as to whether there will be OPEC cuts but really about the size of the cuts; and lower prices will be required for the market to give credibility to them. The market might want to push OPEC into meaningful cuts, through lower prices, rather than having OPEC doing a Trichet trick." In June, Jean-Claude Trichet, president of the European Central Bank, announced his bank might raise interest rates and triggered what was at that time the biggest 2-day gain ever on the New York futures market. It was a feat—Jakob said then—that no war, no hurricanes, no OPEC member had ever previously managed.
The OPEC meeting is "prudently timed to occur after the US presidential election," noted analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va. They speculated that "almost-certain cuts" could "go as deep as 1 million b/d given OPEC producers' average take this year that exceeds $100/bbl." However, they observed, "In practice, the pivot will always be Saudi Arabia's willingness to dip into financial reserves, if necessary, to defend against weaker future prices—a real possibility for a little while, but an ever-harder decision amid global deleveraging and burgeoning domestic spending."
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