MW: Crude futures drop as much as 6%, hold above $70
Traders weigh OPEC uncertainty against global demand concerns
By Myra P. Saefong & Moming Zhou, MarketWatch
SAN FRANCISCO (MarketWatch) -- Crude-oil futures dropped as much as 6% Tuesday, with traders uncertain that a potential production cut by major oil producers will be enough to offset a slowdown in global petroleum demand.
The upcoming expiration of the November crude futures contract, as well as strength in the U.S. dollar also put pressure on dollar-denominated oil prices.
"The dollar strength, expiration issues and usual trading activity has been pushing the market around, but it's really going to gyrate on what OPEC announces and if the participants believe there will be any concrete follow through by them," said Neal Ryan, a managing partner at Ryan Oil & Gas Partners.
Crude for November delivery fell $3.94, or 5.3%, to $70.31 a barrel in electronic trading on Globex. It touched a low of $70.01.
December crude fell $3.36, or 4.5%, to $71.03 a barrel. The November contract expires at the close of trading Tuesday on the New York Mercantile Exchange.
"The pullback today is predicated on the expectation that OPEC, despite calling an emergency meeting, isn't going to do anything of substance this week," said Ryan in emailed comments.
In a news release dated Oct. 16, the Organization of the Petroleum Exporting Countries' Secretary General Abdalla Salem El-Badri announced that the cartel rescheduled its extraordinary meeting to Oct. 24, from Nov. 18.
But "even bold announcements by [OPEC members] in the last few years have been greeted with a lot of skepticism in the market because of the lack of follow through or what I call 'fun with numbers' accounting they use," said Ryan.
"The Saudis are the only member of the cartel with the production wiggle room to accomplish anything, so I'm doubting we'll see anything more than the announcement of a million barrel cut, which the market will greet with further selling," he said.
Crude had been on the rise in the previous two sessions, on speculation that OPEC was poised to cut its production to shore up oil prices.
Still, media reports quote OEC President Chakib Khelil saying that OPEC should impose a "substantial" cut in oil output at its emergency meeting Friday in Vienna. Khelil is also Algeria's energy minister.
Pressures have been mounting within the 13-member group, which controls 40% of the world's oil production, to cut output as crude prices have slumped by about 50% from the all-time high of $147.27 a barrel hit in July.
Edward Meir, an energy analyst at MF Global, estimated that the cartel may cut daily output by 1 million to 2 million barrels. OPEC produced 32 million barrels a day of crude during September, according to a monthly OPEC report.
Failure on tap?
No matter what's decided, Meir believes OPEC's efforts to boost prices may not be successful.
"For one thing, the cartel's track record in 'managing' production in a falling market has not been a good one," wrote Meir in a note. Even a cut of 2 million barrels a day will be outweighed by "the demand vaporization" that's taking place, he said.
Total U.S. petroleum consumption is projected to fall 830,000 barrels a day this year from 2007, according to the latest forecast from the Energy Information Administration.
The market continues to suffer from "persistent concerns over slowing demand for energy due to the cooling global economy, especially with waning demand in the U.S. and China," said Nimit Khamar, analyst at Sucden Research, in a note to clients.
Worries about the credit crisis and the economic slowdown also weighed on U.S. stocks, with major indexes moving lower Tuesday. See Market Snapshot.
Also pushing crude down was the strengthening dollar. The euro continued to lose ground against the greenback, trading as low as $1.3154, the weakest since March 2007. The dollar was also higher against the British pound. See Currencies.
A stronger dollar tends to apply downward pressure on dollar-denominated commodities prices. Gold futures, also denominated in the greenback, moved lower in metals trading. See Metals Stocks.
The rising dollar "is an expression of investors' desire for cash, while credit conditions remain challenging," wrote John Kilduff, an analyst at MF Global, in a note to clients.
In other energy trading, November heating oil fell 5.6 cents, or 2.5%, to $2.154 a gallon. November natural-gas futures traded at $6.767 per million British thermal units, up 2.6 cents.
November reformulated gasoline fell 4.9 cents, or 2.9%, to $1.671 a gallon.
Based on a survey of gasoline retailers, prices for regular gasoline at the pump fell more than 3 cents a gallon from Monday, hitting a national average of $2.889 on Tuesday, according to AAA's Daily Fuel Gauge Report. They're trading close to where they were a year ago.
Tracking the commodities market as a whole, the Reuters/Jefferies CRB Index , a benchmark gauging the prices of major commodities, fell by 1.8%.
Gold futures lost around 2%. See Metals Stocks.
