Oil Energy Money

When the financial crisis first broke in August last year, commodities were a lifeboat for money.  Considered a safe haven, oil broke $100 for the first time in history and peaked at $147 this July.  But now oil prices have fallen off the boat and they’re sinking fast.

Oil producers blamed speculation for the price hike, grudgingly increasing production while claiming supply was already high enough to meet demand.  Oil Energy Money reported OPEC Secretary General Abdalla Salem El-Badri’s statement that “The turmoil in some global equity markets and the considerable depreciation in the US dollar” were to blame for price increases.  “There is clearly no shortage of oil in the market,” said El-Badri.

Well, he was right, and investors now realise that a surplus supply coupled with reduced demand for oil both in America and globally has led to an overpriced commodity.

On top of this realisation, the credit crunch has led to liquidity problems in many banks.  The Wall Street Journal reports that banks can no longer borrow to fund their physical oil trades.  Oil producers, in turn, are reluctant to trade with banks due to counterparty risk, the fear that banks will go bankrupt and not be able to complete their transactions.  Apparently, some oil producers have told their desks not to trade with Morgan Stanley and Merrill Lynch.

This illiquid market goes some way to explaining NYMEX crude’s $4.14 decline to $84.81, its lowest value this year.

Now, OPEC is acting to decrease supply in the hopes of pushing prices back up.  It has called an emergency meeting in Vienna on November 18th, a month before it’s next scheduled meeting.  Saudi Arabia has the greatest flexibility in short term production so expect a cut from them, more than negating the 300,000 bpd increase last May. 

The supply decrease should increase prices but it is difficult to tell whether oil is positively or negatively correlated with equity indices.  Six months ago a negative correlation seemed obvious, right now a positive relationship reins.  Until the relationship clarifies many oil speculators remain up creek without a paddle.