Crude Oil opens the floodgates of stop-loss selling

The Oct NYMEX crude oil contract closed on Friday at $115.46, near the low of $115.00, before we knew what Hurricane Gustav would do. It took forever but the storm finally made landfall on Monday but only as a Force 1 hurricane. By late Monday, oil was down to $111.25 in electronic trading and by today, it had fallen a stunning $10 to a five-month low of $105.46 this morning. Bloomberg reports that it rose back up to $108.29 at 11:32 am London time.

We have a number of observations on this outcome. First is that the price has broken the May low by going under $110. Surpassing a previous low opens the floodgates of stop-loss selling. We wrote a piece for the Sept 1 issue of Currency Trader magazine making the case for oil falling to a “normal” $75-85 range (and the US dollar tagging along to the 1.4400 level).

Access to the magazine is free, by the way.

Second, this is a textbook example of how existing sentiment prejudices a price outcome. If sentiment had still been for higher prices, we would be seeing higher prices on the halt in US production and the cost to oil producers of stopping, cleaning up damage, and starting up again. As it happened, the oil companies are already inspecting their Gulf platforms and may resume production right away, this week, so instead of talking about the loss of production, we are looking at a glass half-full. Compared to Katrina, it is half-full, so this is the right way of looking at it, but it’s no stretch of the imagination to see the alternative scenario.

Now that the bias has changed, it will take a barricade of Mack trucks to halt it.

This is the context in which we need to view the OPEC meeting next week in Vienna. OPEC is almost sure to cut production now that prices have fallen so far (28% from the peak of $147.27 in July), although we have yet to hear the official Saudi stance. If Saudi Arabia keeps its promise to produce flat out, it almost doesn’t matter what the others decide. Price may be affected only a little, and the main fallout could be a dent in Saudi leadership. Besides, who wants to cut production? Iran.

Bye For Now

Barbara Rockefeller