January 19, 2007 08:26 am
Plunging oil has investors asking: How low can it go?
From Friday's Globe and Mail
Crude oil plunged below $50 (U.S.) a barrel yesterday, driving energy stocks lower and raising doubts that it will find a floor any time soon.
"If you said 45 bucks three months ago, they'd burn you as a heretic," said Andrew Martyn, a vice-president and portfolio manager at Davis-Rea in Toronto.
The price of crude slipped as low as $49.90 a barrel for February delivery -- after soaring to a record $78.40 (U.S.) a barrel just last summer -- before closing down $1.76 at $50.48 in New York.
The new 20-month low came as the U.S. Energy Information Administration revealed that stocks of the stuff south of the border jumped 6.8 million barrels last week, more than 20 times the rise analysts had expected, according to a Dow Jones survey. As well, the International Energy Agency chopped its oil demand forecast for the fourth time in five months.
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"That reminded us of good old-fashioned demand and supply," said Patricia Croft, chief economist at Phillips Hager & North Investment Management in Toronto. "It just points out in black and white that, yes, demand is declining and supply is stable to slightly higher -- and that OPEC, for all their chatter [about cutting production] isn't doing that much."
The plunge may have created some big winners in the hedge fund community. The number of bets by hedgies and other speculators that crude will continue to fall are at their highest level since at least 1987, according to the Commodities Futures Trading Commission in the U.S.
Speculative long positions -- or wagers that oil will climb -- have tumbled 24 per cent since peaking in May as traders rushed to the short end of the seesaw. Bets against the commodity have risen in lockstep with unseasonably warm temperatures in North America and swelling inventories.
Ms. Croft figures the price could far as fall as $45 before the slide comes to a halt.
In a noxious mix with falling gold and copper prices, along with pronouncements by central bankers in the U.S. and Canada, crude's dip snuffed the life out of attempted stock market rallies in both countries yesterday.
The energy- and materials-heavy S&P/TSX composite index, which began the day by gaining nearly 54 points, turned tail and headed south, closing at 12,640.68, down 89.73 or 0.7 per cent from Wednesday.
Leading the escalator down were oil and gas producers such as Suncor Energy, down 58 cents (Canadian) to $84.51, and EnCana (down $1.29 to $53.59), copper miner Teck Cominco (down $1.62 to $79.88) and gold miners Agnico-Eagle (down $2.34 to $42.23) and Barrick Gold (down 67 cents to $33.29).
The Bank of Canada provided another wet blanket when, in its latest monetary policy report, it said it has pared its forecast for domestic economic growth this year to 2.3 per cent from 2.5 per cent, citing lower U.S. demand for building materials and autos.
What it added up to for Mr. Martyn is a heavier dose of uncertainty.
"Usually . . . the better returns flow in January and February, and if those end up being in the doghouse, it's . . . uncomfortable to rely on a summer rally to pull you into positive numbers," he said. "So, it's an unnerving market here. It's not an easy market to call any more."
Meanwhile, U.S. investors took absolutely no comfort from efforts by Federal Reserve Board chairman Ben Bernanke to light a fire under Congress by talking about the perils posed to the U.S. economy by the impending retirement of tens of millions of aging baby boomers. In testimony before the U.S. Senate budget committee, Mr. Bernanke warned the economy could be "seriously weakened" unless Washington comes to grips with deficits and reforms to Social Security and Medicare.
As well, news that the U.S. consumer price index rose last month for the first time since last August made it less likely that Mr. Bernanke and his colleagues will cut interest rates any time soon.
As a result, the Dow Jones closed at 12,567.93, down 0.07 per cent, and the S&P 500 slipped 0.3 per cent to 1,426.37.
As for the technology-driven Nasdaq Stock Market, it had an additional push-down as investors reacted badly to news announced after the close Wednesday by Apple Inc. that it expects its second-quarter profit to come in below analysts' forecasts. Nasdaq closed at 2,443.21, down 1.46 per cent.