Last week the world bourses experienced almost a complete meltdown.
If it had happened in just one day rather than five days it would be seen for what it is: a crash. Trillions of dollars have been wiped off the books, affecting every person and every future. On the New York Stock Exchange it had the worst week in its long history. This is panic.
Energy prices slumped last week as analysts and markets began repricing asset classes in the light of the new reality of world recession.
Crude is seeing the daily oil balance rise to three or four million barrels per day of surplus production capacity available for sales in the world at any time from its low of under two million barrels that could be added to supplies.
This has had the effect of deflating the $25.00-$30.00 per barrel in risk premium. That is why the price has fallen so fast, with the two world light sweet benchmarks of WTI and Brent losing 40 per cent of their value from their highs of this summer.
Last week West Texas Intermediate, the North American light sweet crude benchmark, fell below $80 per barrel for the first time in 13 months, closing Friday at $77.70.
Note, however, that it took from 1979 to 2007 before reaching $80 on an inflation adjusted basis. Historically, such a rapid price rise as experienced this past year is usually followed by a near term 40 per cent reversal. If this casual rule holds then the price should be around $87 rather than its current $77.
Either (1) crude has become “oversold,” and will rise slightly over the next few weeks; or, (2) with the world heading toward recession the fundamentals are adjusting the price lower, possibly falling into the mid-$60 range. However, the crude oil price highs came at a time of US dollar weakness, so the price overstated crude values slightly.
On an inflation adjusted basis, then, the price of crude has fallen around 40 per cent, just as the casual rule of price retrenchment would predict.
In the DME Oman market the price drop has been even steeper, falling to $69 yesterday in after-hours trading from its high of $141.20 in the last week of June this year, a 51 per cent fall in price. Even though China remains a strong customer whose demand is not likely to slip, Japan and South Korea are facing serious economic slowdowns affecting their demand for Arabian Gulf crudes.
For Nymex and DME the back oil contracts continued to be higher than the nearby delivery months, indicating that the belief still exists for increasing oil demand in the coming years.
Nymex natural gas benchmark trading closed the week at $6.53 per million Btu (British thermal units), down from the previous week’s closing price of $7.62, breaking out to the down side from its range-bound trading of the past weeks. All the back contracts were higher.
With the falling crude price, the UAE should remain in excellent financial shape since it is estimated that crude would have to fall below $30 before UAE national balance sheets would be under stress.