Oil Drops Most in 17 Years in Quarter on Economy Woes (Update2)

By Margot Habiby


Sept. 30 (Bloomberg) -- Crude oil futures plunged 28 percent in the third quarter, their biggest decline since 1991, amid concern that slowing economic growth will curtail global demand and as the dollar advanced.

Oil traded within a $56 range in the quarter, reaching a record $147.27 a barrel on July 11 and retreating to as low as $90.51 a barrel on Sept. 16, as long-term supply concerns gave way to forecasts a recession would cause fuel use to drop. The dollar is having its best quarterly gain against the euro.

``It's been one of the wildest quarters I've ever seen,'' said Peter Beutel, president of Cameron Hanover Inc. in Stamford, Connecticut, who has been watching the oil market for 25 years.

Crude oil for November delivery fell $39.36 in the three months ended today to settle at $100.64 a barrel at 2:51 p.m. in New York Mercantile Exchange trading. It was the first decline in seven quarters. Futures moved 5 percent or more on a quarter of the trading days. Oil rose $4.27, or 4.4 percent, today.

Crude posted the biggest single-day gain ever on Sept. 22, as traders rushed to unwind positions on the October contract's last day of trading. Prices rose as much as $25.45 a barrel before closing up $16.37, or 16 percent, to $120.92 a barrel.

``It's certainly been a tremendously volatile quarter, and you can throw the way the October contract expiration occurred in as a part of that,'' said Tim Evans, an energy analyst with Citi Futures Perspective in New York. ``Volatility has just bloomed here and hasn't settled down.''

Volatility Index

The Chicago Board Options Exchange Crude Oil Volatility Index, or OVX, rose to a record 64.21 yesterday, then retreated to 59.84 at 3:07 p.m. New York time today, which would be the second-highest closing level. The gauge, introduced by the largest U.S. options exchange on July 15, extends back to May 2007 and measures expected price swings for the United States Oil Fund, an exchange-traded fund tracking crude futures.

The dollar's advance in the quarter reduced oil's appeal among investors who purchased energy and metals as a hedge against the currency's drop earlier in the year. The euro declined the most versus the dollar today since its introduction in 1999.

The International Energy Agency, adviser to 27 nations, on Sept. 10 lowered its 2008 demand forecast as high prices and slowing economic growth trimmed demand for diesel, gasoline and jet fuel. The agency cut its 2008 forecast by 100,000 barrels to 86.8 million barrels a day and the 2009 forecast by 140,000 barrels to 87.6 million barrels a day.

OPEC Oil

The Organization of Petroleum Exporting Countries, which supplies more than 40 percent of the world's oil, cut its forecast for 2009 oil demand on Sept. 16. The 13-member group said oil consumption will average 87.66 million barrels a day next year, compared with 87.80 million barrels a day in its previous outlook. It also cut its 2008 forecast by 120,000 barrels a day.

U.S. stocks plunged yesterday after U.S. lawmakers rejected a $700 billion plan to rescue the financial system. The move caused the Standard & Poor's 500 Index to tumble the most since the 1987 crash and the Dow Jones Industrial Average to post its biggest point drop ever. The indexes rallied today on speculation Congress will salvage the package.

``Our most pressing concern is to what extent the U.S. virus spreads globally and specifically to China,'' Adam Sieminski, a Deutsche Bank AG analyst in Washington, said in a report yesterday. ``We believe recessions are under way in both Europe and Japan, and that U.S. growth over the next few quarters looks to be very flat at best.''

Forecast for 2009

Deutsche Bank yesterday slashed its 2009 New York oil price forecast by 23 percent to $92.50 a barrel because of the economic crisis.

U.S. petroleum demand is about 4 percent below year-ago levels, amid rising U.S. economic growth, according to Citi's Evans.

``That's a pretty clear indication that consumers were making efforts to become more efficient in their petroleum use as a response to all-time high prices,'' he said, adding that ``the economic pressures that high prices for crude oil brought'' have a lot to do with the quarterly slide in prices.

Oil averaged $118.22 a barrel in the quarter, down 4.5 percent from a second-quarter average of $123.80, a record. It was the first time the average price dropped in six quarters.

No Impact

Futures couldn't sustain a rally even when faced with factors which under other conditions would have driven the market higher, Beutel said. They include Hurricanes Ike and Gustav, which shut in all of U.S. Gulf of Mexico production and much of the region's refining capacity, the Russian incursion into Georgia, an OPEC production cut, pipeline fires and Nigerian unrest.

``Had you told me July 11 that we've got two hurricanes coming, one that will hit Louisiana and one that will hit Texas, we've got an OPEC cut coming, we've got Russia going into Georgia and a number of attacks into Nigeria, I would have said without a second's hesitation that we would have been over $200, no question,'' he said.

U.S. gasoline stockpiles fell to an 18-year low in the week ended Sept. 12 after the hurricanes struck Texas and Louisiana, according to the U.S. Energy Department. U.S. refiners operated at 66.7 percent of capacity in the week ended Sept. 19, the lowest since at least 1989, because of storm damage.

Gasoline prices have dropped the most since the third quarter of 2006. Futures for October delivery fell $1.0168, or 29 percent, in the three months ended today to settle at $2.4847 a gallon. Today, gasoline added 8.77 cents, or 3.7 percent.

Regular gasoline, averaged nationwide, dropped 11 percent in the quarter to $3.633 a gallon, according to AAA, the nation's largest motorist organization. It was the first quarterly decline in a year. The price peaked at $4.114 a gallon on July 16.