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Oil Goes to the Bears

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Oil Goes to the Bears

Even a War Can’t Stop 
Decline in Crude, 
Now Below $115
August 12, 2008; Page C1

Just weeks ago the fragile commodities markets could be sparked ahead by a mere hint of bad news. That market psychology has reversed, with Monday’s action showing that even war can’t halt oil’s current retreat.

Inside the commodity-trading pits and brokerage houses, the conversation isn’t whether prices are pulling back in the near term, but how far and for how long.

Associated Press
Read the Pump: Is oil run-up over? (a gas station in Vancouver, Wash.)

That was made clear as markets digested increasingly violent images of conflict between Russia and the oil crossroads of Georgia. Oil prices fell to as low as $112.72 a barrel before settling at $114.45 a barrel, down 75 cents, for the September delivery contract on the New York Mercantile Exchange. (See related article.)

Until a few weeks ago, even fears of geopolitical conflict tended to push up prices. In early June, for example, oil jumped more than $10 when, among other things, an Israeli official warned that Iran would face attack if it pursues a nuclear-weapons program.

Now, the market’s deepening losses reflect how rapidly pessimism has mounted about European and Japanese economic contractions knocking out raw-materials demand. Traders also fear that as these economies weaken, the dollar’s new strength will push down prices of commodities denominated in dollars.

Since June 30, oil on the New York Mercantile Exchange has fallen 18%, and natural gas has sunk 37%, to $8.349 a million British thermal units.

The pullback has spread to other commodities as well. Since the June quarter-end, gold is off more than 11%, and several industrial metals also have tanked. Agriculture has pulled way back, with a 31% drop for corn, a 24% drop for soybeans and a 5.9% drop for wheat.


Many market watchers expect the basics of supply and demand to build in a pricing floor well above where commodities traded a year ago. Then, oil was still in the $70-per-barrel range, gold was $670 an ounce compared with Monday’s $821.50 and corn was at $3.33 a bushel compared with $4.97 Monday. Market players see the likelihood of upward spurts in the future.

But the recent and sharp declines suggest that some of the circumstances that helped push prices to unheard-of heights earlier this year have moderated.

Thursday, a day before oil staged one of its biggest drops in weeks, Goldman Sachs Group Inc. analysts declared a buying opportunity. They argued that unforeseen climbs in oil and crop prices earlier this summer had triggered “temporary” demand weakness that could bounce back as prices drift to a more acceptable equilibrium. In the oil markets, despite weak U.S. demand, inventories remain at “critically low levels,” indicating that any supplies made available by weakness in U.S. demand “are being consumed by emerging economies.”

Corn and soybean inventories are also apt to be low going into next year, providing “substantial upside” from current prices, they contend.

[Jim Rogers]

They forecast $145.30 crude three months from now, and $147 oil a year from now.

The prominent commodities bull, investor Jim Rogers, in an interview insists he isn’t losing faith.

“I’ve been hearing the commodities bubble is dead for seven years,” he says. “Maybe it will end, but I don’t think it will be for another” several years, he says. The market is simply consolidating, he says. He points out that investors wrote off gold because it reversed a climb upward in the 1970s for two years. But then it went on to much greater heights.

Today’s bull market in oil started in 1999, Mr. Rogers says, and has had several significant pullbacks since then, “which scared the socks off the bulls.”

Within major banks, there is disagreement about the sustainability of commodities prices. Analysts at Deutsche Bank AG’s global macro strategy group declared July 31 that oil was set to fall from its peak to $100 a barrel in the first quarter of 2009 and to $85 by early 2010.

Yet the bank’s commodities specialists expect to see $135 again sometime in the third quarter and say falling inventories in the U.S. Midwest indicate that fundamentals are “tightening and may herald a stabilisation in the oil price.”

Bank of Montreal global portfolio strategist Donald Coxe wrote last week that when “anguished clients” ask whether the commodities bull run is over, he says “definitely not.”

Yet that same week, a BMO senior economist, Sal Guatieri, declared the commodities boom “over.” BMO says Mr. Guatieri was referring to a moderation in prices, not a collapse.

Some short-term dynamics help the bearish case. So-called noncommercial oil traders, which include players such as hedge funds, have been reversing once-bullish bets. Independent energy-market analyst Stephen Schork pointed out Monday that as of Aug. 5, according to regulatory data, noncommercial traders moved to their largest bearish view in oil futures since February 2007.

The credit crunch has made it harder for such traders to nurse bullish commodity futures bets as the market has turned, because of the collateral, or margin, traders must post to stay in the game. What’s more, many are bailing out of positions as Congress debates a legislative overhaul of commodity markets that could reduce the size of bets speculators can make.

Meanwhile, markets have grown jittery in the face of rumors that large traders were liquidating holdings in the volatile energy markets, especially after the July bankruptcy filing of a large oil trader, SemGroup LP, which has confirmed that it exited big oil-futures positions in July.

Citigroup analyst Tim Evans, who has repeatedly argued that oil was overpriced, said Monday that the momentum had swung to the bears. “The petroleum markets are considering a swing back to the upside, but seem to be having difficulty fighting off the ongoing flow of selling.”

In other commodity markets:

GOLD: Prices on the Comex division of the Nymex fell sharply as selling increased due to the rebound in the dollar and weakness in crude oil. Nearby August gold fell $36.30 to settle at $821.50 a troy ounce.

WHEAT: Prices on the Chicago Board of Trade rose as traders bought futures to offset previous sales and prepared for Tuesday’s scheduled release of U.S. Agriculture Department August crop data. A lack of aggressive selling in corn and soybeans allowed wheat to climb, traders said. September wheat rose 28.50 cents to settle at $7.9375 a bushel.

–Carolyn Cui, Guy Chazan and Gregory Meyer contributed to this article.

Write to Ann Davis at [email protected]

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