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Oil $36.22 a barrel on New York Mercantile Exchange, the lowest price since June 2004

THE WALL STREET JOURNAL

DECEMBER 19, 2008

Oil’s plunge below $40 a barrel is partly an anomaly due to the expiring January crude-futures contract. It also may be a sign of things to come.

Futures contracts for January delivery yielded under heavy selling pressure Thursday to finish down $3.84, or 9.6%, at $36.22 a barrel on the New York Mercantile Exchange, the lowest price since June 2004.

[Crude-Oil Spreads]

The drop followed an 8.1% decline on Wednesday for a 75% slide from a high of $145.29 a barrel less than six months ago. Despite Wednesday’s announcement of a production cut by the Organization of Petroleum Exporting Countries, swelling inventories and weakening demand amid a global economic slump are weighing on oil prices.

On Thursday, J.P. Morgan Chase lowered its price forecast for 2009 to an average of $43 a barrel, down from a previous estimate of $69 a barrel. Many expect temporary dips to $30 or below through the end of winter.

“Does OPEC have the muscle to impact prices while the global economy is so weak?” asked Joe Terranova, chief alternatives strategist of Virtus Investment Partners.

January crude futures expire on Friday, and the bulk of trading volume has already moved on to the February contract. With volume light, traders looking to exit their January positions in order to avoid taking delivery of physical barrels of oil received lower prices than they would have in a more liquid market.

The February contract ended Thursday at $41.67 a barrel, within the range of prices for much of the last two weeks.

While traders are reluctant to overstate the significance of Thursday’s trading, many predict that once it becomes the front-month contract, February will pick up where January left off.

“Even with the cut by OPEC, the big story is really the economy and the demand picture going forward,” said Matt Zeman, head of trading at LaSalle Futures Group in Chicago. “We’ll see February futures … at $35, and possibly $30.”

The big price drop over the past two days was exacerbated by the lack of available space at Cushing, Okla., the oil-storage hub where the physical barrels that underpin the Nymex futures contract are delivered. Inventories topped 27.5 million barrels at Cushing last week, just 500,000 barrels below the all-time high in April 2007, when a Texas refinery fire led to a stockpiling of crude.

Investors with expiring contracts to buy crude need to sell out this week, or pay a hefty fee to avoid taking delivery. Physical delivery of crude contracted in the futures market is rare, but with tank space at Cushing difficult to come by, physical delivery is especially undesirable due to rising storage costs. The record gap between the first and second-month contracts — $5.81 at Thursday’s settlement — reflects the scarcity of buyers willing to take crude for January delivery so close to expiration.

Analysts also question whether OPEC’s members will fully comply with their agreed cuts of 2.2 million barrels. In 2001, it took the cartel several cuts and coordination with non-OPEC countries to eventually stop oil’s slide.

A recent Dow Jones Newswires survey showed that production cuts by OPEC members in November were about 915,000 barrels, substantially less than the 1.5 million barrels they pledged in October.

The latest announcement, which would be OPEC’s single deepest cut, won’t be effective until January. “Nobody is willing to take a risk” before the full impact sets in “because nobody knows what the demand will look like by then,” said Fadel Gheit, a senior oil analyst at Oppenheimer & Co.

Global oil demand, currently about 86 million barrels a day, may contract by one million barrels a day, or 1.2%, next year, the largest drop since 1983, estimates Adam Sieminski, chief energy economist at Deutsche Bank.

In other commodity markets:

HOGS: Most futures rose, supported by concerns over winter storms in the Midwest and Plains making transportation of swine to and from slaughterhouses difficult. While CME February lean hog futures fell 0.15 cent to 62.48 cents a pound, all other months rose. April gained 0.18 cent to 69.65 cents.

COPPER: Slumping demand pummeled futures, extending the metal’s four-year low. The most-active March copper fell 7.15 cents, or 5.2%, to settle at $1.3015 a pound on the Comex division of the New York Mercantile Exchange. Nearby December copper settled at $1.2695.

Write to Brian Baskin at [email protected] and Carolyn Cui at [email protected]

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