MW: Oil drops over 9% as OPEC keeps output on hold
Grim economic news heighten worries over a slowdown in energy demand
NEW YORK (MarketWatch) -- Oil futures tumbled more than 9% Monday, coming under heavy selling pressure after OPEC left current output targets unchanged and in the face of weak economic data from around the world.
Crude oil for January delivery fell $5.15, or 9.4%, to end at $49.28 a barrel on the New York Mercantile Exchange.
Earlier, the contract hit an intraday low of $49.05 a barrel in electronic trading on Globex.
The Organization of Petroleum Exporting Countries ended a weekend meeting in Cairo without any decision on a production cut. OPEC President and Algerian Oil Minister Chakib Khelil said he expects oil demand to decline from a month ago, and said the group would take necessary action on Dec. 17 when it meets in Oran, Algeria.
"The bulls may have been hoping for OPEC to cut this weekend, but it was not to be, as the group has decided to wait and ensure strict compliance output limits before cutting again," said Michael Davies, an analyst at Sucden Research, in a note.
OPEC Secretary General Abdalla Salem El Badri said the cartel will cut production in December by a "good amount," according to media reports. He also said that crude prices in the range of $70-$90 a barrel would be "very reasonable."
"When it comes to calibrating supply and demand to fit the new post-September economic realities, OPEC seems to be in a state of denial and surprisingly blasé about the dire state of the markets," said Edward Meir, an analyst at MF Global, in a note.
"This is especially evident if one compares the action of the cartel to other commodity producers, say mining companies, who have slashed output substantially in light of the recent demand implosion for metals," Meir said.
Gold and other metals posted steep losses Monday. Gold for February delivery dropped $42.20 to end at $776.80 an ounce on the New York Mercantile Exchange. See Metals Stocks.
The Reuters/Jefferies CRB Index , a benchmark gauging the prices of major commodities, fell 3.5% to 233.44 points.
James Williams of WTRG Economics said that Saudi Arabia, a key member of OPEC, may refrain from additional cuts in their own production until other members are in compliance with existing agreements to cut production.
While supplies are down about 1.2 million barrels per day in November, that figure is still short of the 1.5 million barrel goal agreed in late October, Williams said.
"Preliminary estimates indicate that Venezuelan and Nigerian cuts are minimal and that Iran's cut is only half of its allocation," Williams said. At the same time, U.S. consumption in the last four weeks is 1.35 million barrels less than last year.
Grim economic data
Also weighing on oil prices Monday were significant drops in manufacturing gauges in the United States, China, the euro zone and Britain. A gauge of China's manufacturing activity in November, as compiled by brokerage CLSA Asia-Pacific Markets, marked the sharpest drop in the history of the survey, which began in 2004. Read more.
In the U.S., the November ISM reading for manufacturing activity decreased to 36.2%, the lowest reading since May 1982, from 38.9% in the prior month. Readings above 50% indicate an expansion of the manufacturing economy, while readings below indicate a contraction. See Economic Report.
The U.S. economy entered a recession in December 2007, a committee of economists at the private National Bureau of Economic Research said Monday. The economy reached a peak of activity in December 2007 and has been declining since, according to the business cycle dating committee of the NBER. Read more.
The bleak economic data heightened worries that a sharp slowdown in global growth will cause a reduction in energy demand.
Against this grim backdrop, Federal Reserve Chairman Ben Bernanke said Monday that the Fed has lowered interest rates just about as far as they can go, but the U.S. central bank still has plenty of available firepower it could deploy to restore financial markets to normal.
The Fed could buy Treasury notes and bonds or agency bonds in a bid to drive yields lower and "spur aggregate demand," Bernanke said. See The Fed.
On Wall Street, U.S. stock futures fell sharply, with the Dow Jones Industrial Average dropping 679.90 points, or 7.7%, to 8,149. See Market Snapshot.
Also on Globex, other energy futures also posted losses. January reformulated gasoline fell 10 cents, or 8%, to $1.11 a gallon and January heating oil dropped 11 cents, or 6%, to end at $1.62 a gallon.
In contrast, January natural gas futures gained 9 cents to $6.60 per million British thermal units.
