Crude drops below $40

Crude drops below $40

Prices drops drastically despite weak dollar and production cut

Crude prices dropped substantially today, Wednesday, 17 December, 2008. Prices fell despite a weak dollar and also as OPEC announced another production cut. But prices fell as an impact of the weekly inventory report by the energy department.

On Wednesday, crude-oil futures for light sweet crude for January delivery closed at $40.06/barrel (lower by $3.54 or 2%) on the New York Mercantile Exchange. Earlier in the day, prices touched a low of $39.98. Prices reached a high of $147 on 11 July but have dropped almost 73% since then. On 5 Dec, 2008, prices touched a low of $40.5. Last week, prices ended higher by almost 13%. Prior to that, prices coughed up 25% in the week before that. That was the largest weekly loss for crude in past twenty five years. For this year in 2008, crude prices have dropped 51%.

For the month of November, crude prices ended lower by 19.7%. Before this, for the month of October, 2008, crude prices had ended lower by 32.6%, the biggest monthly drop since 1983.

After a meeting in Oran, Algeria, the Organization of the Petroleum Exporting Countries agreed to cut 4.2 million barrels a day from its actual September production level of 29.045 million barrels a day. The production cut is effective on 1 January, 2009. Excluding previously announced cuts, OPEC will actually cut its daily production by 2.2 million barrels from current levels. That constitutes its biggest production cut ever.

At the currency market on Wednesday, the dollar extended its losses after the Fed decision yesterday, adding more upward pressures on gold prices. The dollar index fell as much as 2.7% after dropping 2% yesterday.

The Fed slashed its key interest rate to a range of zero to 0.25% yesterday, effectively cutting its key rate for overnight lending to banks by between 0.75% and 1%. It said "the outlook for economic activity has weakened further," adding more worries over falling energy demand.

The Energy Information Administration reported today that that U.S. crude supplies rose by 500,000 barrels to stand at 321.3 million barrels during the week ended 12 December, 2008. At 321.3 million barrels, total U.S. crude inventories were 17.5 million barrels above the five-year average and 24.4 million barrels above year-ago levels. The EIA also reported an increase of 1.3 million barrels in gasoline stocks and a rise of 2.9 million barrels in distillate stocks last week.

For the third quarter of the year crude prices ended lower by 28%. This was the biggest quarterly drop since 1991. Before that, crude prices had gained 38% in the second quarter of this year. It was the biggest quarterly increase in nine years. For the month of September, prices registered drop of 13%.

Against this background, January reformulated gasoline fell 3 cents to end at $1.01 a gallon and January heating oil dropped 2 cents to $1.44 a gallon.

January natural gas futures fell 13 cents to end at $5.62 per million British thermal units.

At the MCX, crude oil for January delivery closed at Rs 2,214/barrel, lower by Rs 97 (4.2%) against previous day's close. Natural gas for December delivery closed at Rs 263.3/mmbtu, lower by Rs 11.5/mmbtu (4.2%).