Crude-oil futures swung between gains and losses Tuesday, as investors made last-minute trading decisions before the front-month contract expires later today.
Crude for February delivery, which registered low volume, slumped more than 10% to $32.70 a barrel, the lowest intraday level for a front-month contract since Dec. 19. It then erased the big losses and rallied more than 4% to $38.20.
In latest trading, February crude was up $1.40, or 3.8%, to $37.91 on the New York Mercantile Exchange.
The March contract, which will become the front-month contract on Wednesday, rose 1.4% to $43.12 a barrel.
The February contract could see extra volatility Tuesday, analysts said.
"There is a lot of last minute positioning," said Phil Flynn, vice president at futures brokerage Alaron Trading. "Expiration is going to be wild."
Traders short selling February oil may have to buy the contract to cover their positions before it expires, while some investors who want to avoid physical oil delivery may be forced to sell their contract.
On Dec. 19, when January futures expired, the contract slumped as much as 10% to $32.40 a barrel price, the lowest since early 2004.
Crude inventories at Cushing, Okla. -- the delivery point for Nymex oil futures -- jumped to 33 million barrels in the week ended Jan. 9, the highest level on record. Operable storage capacity stands at about 34 million barrels, as estimated by Platts.
As Cushing inventories reach the maximum level, storage costs jumped and some investors may have to sell their contract to avoid taking delivery.
The oversupply at Cushing "may have loosened the traditional price connections to related markets," said Nimit Khamar, an energy analyst at Sucden Financial Research, in a note.
The March contract, which is trading about $7 higher than the February contract, "will be exposed when it becomes the front-month to similar weak demand and oversupply concerns," Khamar said.
Futures traders call the situation, in which the price of a short-term futures contract is worth less than a longer-term one, contango.
Economic worries
Gloomy economic news also weighed on crude markets Tuesday.
In the U.K., Royal Bank of Scotland, one of the biggest banks in the country, revealed on Monday that it could be on track to post the biggest annual loss in U.K. corporate history that the U.K. government would take a bigger stake in the lender.
The U.K. government Monday committed tens of billions of dollars more to revive its ailing financial sector.
"Continuing banking turmoil and poor economic conditions, especially in the U.K., contribute negative sentiment to global markets," wrote Nimit Khamar, an energy analyst at Sucden Financial Research, in a note.
In the U.S., President-elect Barack Obama, taking power as the 44th U.S. president Tuesday, is formulating a fiscal stimulus package of more than $800 billion.
"Markets might start to stabilize as they tee off the fact that a new administration is now solely in charge of policy, and will likely usher in much more radical measures to confront the macro crisis at hand," said Edward Meir, an analyst at MF Global.
Also on Nymex Tuesday, February reformulated gasoline fell 7.22 cents, or 6.2%, to $1.095 a gallon and February heating oil dropped 4.46 cents, or 3%, to $1.4288 a gallon.
February natural gas futures fell 11.1 cents, or 2.3%, to $4.69 per million British thermal units.
