Oil Prices Plummet as Weakening Demand and Record Inventories Weigh on Market

Oil prices continued to slide, with crude futures settling 1.3% lower at $37.28 a barrel on the New York Mercantile Exchange, as rising oil and product inventories highlighted weak demand. The decline follows a brief resurgence at the start of the year, with oil prices plummeting from above $145 a barrel in July to below $34 last month. Demand is continuing to decline in the US and other major economies, while excess oil and refined products are piling up at storage terminals.

Key Takeaways:

• Oil prices have resumed their downward trend, settling 1.3% lower at $37.28 a barrel on the New York Mercantile Exchange.
• The price drop is attributed to weakening demand, with oil inventories hitting a record 33 million barrels at Cushing, Okla., the Nymex contract's delivery point, according to the U.S. Energy Information Administration.
• Fuel inventories grew unexpectedly, with gasoline stocks rising by 2.1 million barrels and distillates, including heating oil and diesel, increasing by 6.3 million barrels.
• Refineries are running at a seasonally low 85.2% of capacity, with storage tanks and barges overflowing with crude oil, according to Darin Newsom, a senior analyst at DTN.
• The tight storage situation has caused February crude to end at a $6.91 discount to March, the third-largest such deficit ever.
• Traders expect the gap to continue to widen as the February contract enters its final week of trading.

Statistics:

• Record oil inventories: 33 million barrels at Cushing, Okla.
• Unexpected fuel inventory growth: 2.1 million barrels (gasoline) and 6.3 million barrels (distillates).
• Refinery capacity use: 85.2% (seasonally low).
• Price premium for March crude: $6.91 (third-largest deficit ever).
• Expected widening of price gap: Traders anticipate the gap to continue to widen as the February contract enters its final week of trading.

Sources:

• Dow Jones Commodities News via Comtex, January 14, 2009.
• Brian Baskin, Dow Jones Newswires, 201-938-2062, brian.baskin@dowjones.com.