Oil price rout deepest in 16 years

SINGAPORE – Oil prices have fallen as much as US$16 from their peaks, their steepest reversal in 16 years, in a correction that traders say may be harder to shake off than past setbacks in the market’s four-year rally.

In real terms Brent has fallen US$16,02 since it hit a high of US$78,65 on August 8. This marks its biggest decline from peak to trough since prices fell from US$40 in October 1990 after Iraq’s invasion of Kuwait to US$16 in February 1991, when US-led ground forces expelled Iraqi forces.Brent is down more than 20 per cent from its peak, meeting the technical criteria for the start of a bear market.US crude has dropped nearly US$15 to hit a near six-month low of US$63,50 a barrel yesterday, a fall only a hair shy of those in August-November 2005 and October-December 2004.In those cases, oil made new highs five to eight months later.In percentage terms there have been bigger stumbles on oil’s recent ascent, propelled steadily higher since 2002 by the war in Iraq, soaring Chinese demand, constrained oilfield and refinery production, devastating US Gulf Coast hurricanes, and most recently fears of a disruption to Iran’s exports.But some say this latest setback – triggered by easing concerns on Iran, a weak storm season and a refocusing on healthy consumer nation inventories – may prove more lasting.”Even though we’ve retraced certain percentages similar to this, it definitely seems that the market is different now,” says New York-based ABN AMRO broker John Brady.”Other times I saw (the corrections) leading to great buy opportunities, but I don’t necessarily think that this time.”Technical analysts who study past price action for future direction, say the drop through the 200-day moving average last week and this week’s fall below a three-year trend line – intact since mid-2003 – both send worrying signals.Tetsu Emori, an analyst at Mitsui Bussan Futures in Tokyo, sees average annual oil prices peaking every five years.”If nothing more happens then…this peak could be a candidate for the highest price in the five-year cycle.”Analysts say the global environment is different than two or three years ago, when central banks were aiding liquidity with low interest rates and investors were seeking alternatives to sluggish equity and fixed-income markets.Tighter conditions from Japan to the United States may now limit the kind of investor influx that helped oil get back on track in each of the market’s past corrections, while economic growth appears to be slowing.Lastly the market has been in a contango structure for nearly two years, forcing the growing number of passive long-only investors to pay up each time they roll their positions forward – a potential deterrent for investing more.While many analysts say the worst may not be over yet in the latest shake-out, most also agree that there remains scope for another attempt at surpassing the previous summit.”I do think this dip could well outdo those last two falls, but I don’t think it destroys the story,” says Tobin Gorey, commodities strategist at the Commonwealth Bank of Australia.Some say the depth of the drop could spell the end.Nampa-ReutersThis marks its biggest decline from peak to trough since prices fell from US$40 in October 1990 after Iraq’s invasion of Kuwait to US$16 in February 1991, when US-led ground forces expelled Iraqi forces.Brent is down more than 20 per cent from its peak, meeting the technical criteria for the start of a bear market.US crude has dropped nearly US$15 to hit a near six-month low of US$63,50 a barrel yesterday, a fall only a hair shy of those in August-November 2005 and October-December 2004.In those cases, oil made new highs five to eight months later.In percentage terms there have been bigger stumbles on oil’s recent ascent, propelled steadily higher since 2002 by the war in Iraq, soaring Chinese demand, constrained oilfield and refinery production, devastating US Gulf Coast hurricanes, and most recently fears of a disruption to Iran’s exports.But some say this latest setback – triggered by easing concerns on Iran, a weak storm season and a refocusing on healthy consumer nation inventories – may prove more lasting.”Even though we’ve retraced certain percentages similar to this, it definitely seems that the market is different now,” says New York-based ABN AMRO broker John Brady.”Other times I saw (the corrections) leading to great buy opportunities, but I don’t necessarily think that this time.”Technical analysts who study past price action for future direction, say the drop through the 200-day moving average last week and this week’s fall below a three-year trend line – intact since mid-2003 – both send worrying signals.Tetsu Emori, an analyst at Mitsui Bussan Futures in Tokyo, sees average annual oil prices peaking every five years.”If nothing more happens then…this peak could be a candidate for the highest price in the five-year cycle.”Analysts say the global environment is different than two or three years ago, when central banks were aiding liquidity with low interest rates and investors were seeking alternatives to sluggish equity and fixed-income markets.Tighter conditions from Japan to the United States may now limit the kind of investor influx that helped oil get back on track in each of the market’s past corrections, while economic growth appears to be slowing.Lastly the market has been in a contango structure for nearly two years, forcing the growing number of passive long-only investors to pay up each time they roll their positions forward – a potential deterrent for investing more.While many analysts say the worst may not be over yet in the latest shake-out, most also agree that there remains scope for another attempt at surpassing the previous summit.”I do think this dip could well outdo those last two falls, but I don’t think it destroys the story,” says Tobin Gorey, commodities strategist at the Commonwealth Bank of Australia.Some say the depth of the drop could spell the end.Nampa-Reuters