Oil prices fall below $78 a barrel
After peaking in July, oil futures drop to lowest point in 13 months.
Mirroring declines in stock markets worldwide, New York oil futures fell nearly $9 to dip below $78 a barrel Friday for the first time in 13 months, raising the prospect of $60 oil by year's end.
The unrelenting declines in stock values, combined with increasingly bleak economic news, has oil traders backpedaling. The cost of light, sweet crude for November delivery closed down $8.83, or 10%, to $77.76 a barrel on the New York Mercantile Exchange.
Oil was last this cheap on Sept. 11, 2007, when it hit $76.92 a barrel. Oil peaked above $147 in July.
Some of the decline reflects a flight from markets of all kinds.
Another factor is the oil-market retreat by investment banks such as Goldman Sachs and Morgan Stanley, which grew to become influential players in petroleum trading during the multi-year bull run in oil.
Morgan Stanley shares were one of the largest losers in Friday's plunge, as worries spread over which investment banks had the most exposure to soured loan investments. Those companies are finding it harder to line up trading partners, according to the Oil Price Information Service.
Most of all, market analysts expect the nation's steady drop in U.S. demand to snowball, putting a long-term squeeze on worldwide demand. Simply put: Economies that are slowing or in recession don't need as much oil.
The latest report from the International Energy Agency reinforced that notion. The group lowered its forecasts for global oil demand for this year to 86.5 million barrels a day -- representing a 0.5% uptick from 2007 -- and cut 2009 demand projections to 87.2 million barrels a day.
"Expectations of the economy and its implication for oil consumption -- that's really what's causing it," said James Williams, who publishes the Energy Economist newsletter from London, Ark. "That, together with the realization that oil was not in fact a safe haven."
Williams believes the cost of oil will continue to fall could reach the $60 level, even if the Organization of the Petroleum Exporting Countries opts to cut production when its ministers meet Nov. 18. "Recessions trump OPEC cuts," he said.
IEA officials cautioned, however, that demand is still growing in emerging markets such as China, India and the Middle East, and that rising consumption in those areas will keep the supply-demand balance tight.
"No one can foresee the ferocity or duration of the current economic tempest, nor whether a full-blown recession will be avoided," the IEA said. But, it add, "we have yet to see unambiguous evidence of a sharp slow-down from China, while Middle Eastern demand remains robust."
In addition, the IEA said the worldwide credit crunch could all but eliminate capital-intensive oil production expansion projects as smaller oil companies and nations such as Russia and Brazil struggle with suddenly falling oil revenue.
elizabeth.douglass@latimes.com
