Oil prices plummeted below $88 a barrel, reaching an 8-month low on Monday, as banking turmoil across Europe compounded fears that a global economic slowdown will begin to significantly cut demand for both oil and gas.
Crude prices are now approaching an astonishing 12-month low, as the combination of a strengthening U.S. dollar and weakening world stock markets perpetuate.
Light, sweet crude for November delivery fell $6.07 to settle at $87.81 a barrel on the New York Mercantile Exchange (NYMEX). This is the lowest closing price for oil since February 6, when the front-month contract closed at $87.14 a barrel.
Prices are a far cry from the July 11 record peak of $147.27. The current trend suggests that these days are long gone; while figures show that the massive gains achieved over the previous twelve months have been completely wiped out.
Paralleled with the drop in oil prices, stock markets across the globe have seen a strong sell-off in recent days.
The Dow Jones Industrial Average tumbled more than 6.6% in mid-afternoon trading, on Monday, sinking below 10,000 for the first time since October 29, 2004.
London's FTSE and the DAX in Frankfurt both fell by more than 7%. Japan's Nikkei tumbled 4.3% to a near 4-year low.
It appears that the equities market is steadily becoming a precursor for the demand level of oil.
The lack of confidence in the markets comes despite the passage of the $700 billion U.S. Treasury's revised bailout package. Henry Paulson’s plan was brought in with the very intervention of bringing stability to the financial markets by absorbing the bank's toxic assets that had prevented them from lending to consumers. All is not going to plan just yet.
The spread of the crisis to European lending institutions in the past few weeks, suggests that consumers across the continent will follow suit with their American counterparts and begin a steady decline for the demand of crude.
Victor Shum, an energy analyst with Purvin and Gertz in Singapore, said: “This deepens the sentiment that we're going to see a more widespread economic slowdown or even recession, and that's no good for oil demand.”
According to OPEC, over the past year, the world's number once consumer, the U.S., has cut oil consumption by 900,000 barrels a day.
The cartel had previously forecasted that global demand would in fact rise by 900,000 barrels a day this year and a further 900,000 barrels in 2009. These predictions were based upon world economic growth of 3.9% in 2008, and 3.7% forecast for next year.
However, the organization that represents the world's major oil producers conceded the current financial crisis will likely to dampen such wildly optimistic predictions.
In its September demand outlook, which was published before the takeover of AIG and news of Washington Mutual’s demise (among others), OPEC said: “That forecast may be subject to downside revision due to the mounting financial risks to growth as witnessed by bankruptcy filing of Lehman Brothers.”
Contrary to the outlook of Chakib Khelil, the OPEC Chairman, who gloomily sees prices continuing to fall, some oil watchers argue that the long-term prospects for oil remain relatively healthy.
Once production is cut, demand will rise. It is economics for dummies that offers an island of hope in a sea of economic uncertainty.
