Wall Street pulls oil to 7-month low
Crude falls sharply as Lehman woes send shudders through the market that the ever-weakening economy will cripple demand. Ike may not have hit as hard as feared.
NEW YORK (CNNMoney.com) -- Oil prices fell sharply Monday as Wall Street's latest tale of woes added fuel to the economic slowdown that has been crippling demand for energy.
In addition, initial reports showed that Hurricane Ike did not do as much damage as was originally feared to the Gulf Coast region.
Oil traded down $5.47 to settle at $95.71 a barrel, the first time oil settled below $100 since March 4 and the lowest settle since Feb. 15. It traded as low as $98.55.
Oil prices started their slide in a special early-start Sunday electronic trading session that was set up in order for the oil market to assess damage from Hurricane Ike.
Electronic trading usually starts at 6 p.m. ET on Sunday, but started at 10 a.m. instead. By mid-afternoon, oil had already traded as low as $94.13.
Economic slowdown: Prices have fallen more than a third, or $51, off the record high price of $147.27 a barrel, set July 11. As the U.S. and global economies have buckled under credit pressures, demand for energy has fallen off.
Lehman Brothers, a 158-year-old investment bank, announced early Monday that it would be filing for Chapter 11 bankruptcy. In addition, Bank of America (BAC, Fortune 500) will purchase Merrill Lynch (MER, Fortune 500) for $50 billion. American International Group, the nation's largest insurer, was planning to restructure in an effort to raise capital.
The barrage of negative news from Wall Street undermines the crippled U.S. economy that has already chipped away at energy demand for months.
"We have a rapidly slowing economy in the U.S. and globally, and needless to say the demand for energy is falling fast," said James Cordier, Portfolio Manager of OptionSellers.com. "The oil market was going to come in $1 or $2 lower, but the additional Lehman news, the taking over of Merrill Lynch, speaks volumes about where the economy is going," and helped move the price of oil even lower.
The Dow was down as much as 366 points Monday. Cordier said that a turnaround on Wall Street could motivate the oil market, but "the pessimism is running rampant and there is no way to see that ending in terms of energy."
"In the past, people bought oil as a hedge against systemic risk in the economy," said Phil Flynn, senior market analyst at Alaron Trading. However, now investors are thinking that Wall Street's failures will batter the already bruised economy and "it is going to have a drag on oil demand."
The news "is bearish for oil because people will realize that this would affect the overall economy, slow down demand, and that would pressure oil prices even lower," Flynn explained.
The financial news "certainly affected the overall mood" of other markets, said Kevin Kerr, editor of Global Commodities Alert, an industry newsletter. In addition, "$100 is a very key psychological level," he added, so the market accelerated when that threshold was breached.
Cordier also said that the $100 threshold was important for the market. "The $100 figure was a psychological support that has been taken out," he said.
Ike: Hurricane Ike slammed the Texas Gulf Coast on Saturday morning, threatening a stronghold of the nation's refining capacity. Oil production rigs were evacuated and refineries were shuttered in preparation for the storm's arrival.
While production in the region remains largely closed down, preliminary reports coming from the region indicate that destruction may not be as significant as feared. Analysts were still waiting for news out of the region, however.
Shell reported "no major structural damage to any of our platforms or drilling rigs," according to a statement on the company's Web site. Shell has already redeployed around 175 personnel to offshore rigs and they will continue until all 1,400 staff members are returned to rigs.
Oil prices were lower Monday because supplies of crude were not drastically impacted by Ike, but demand will be affected, according to Flynn. "The damage from the Hurricane might not be as bad as originally feared," he said. Also, "demand for the products will not be as big - Houston is basically shut down."
The damage to refineries will result in a "glut of crude" said Kerr, but there was not any substantial damage to the Houston ship channel, so crude can still be delivered to the region.
Refineries are especially vulnerable to flooding, and after Hurricane Katrina hit the Gulf in 2005, refineries were out for 6 to 9 months.
The Gulf Coast region houses 42% of total U.S. refining capacity. Texas, where Ike first hit as a Category 2 hurricane, is home to 26 refineries, or more than 25% of the nation's total refining capacity. The 26 refineries can process nearly 4.8 million barrels of crude per day, according to the Department of Energy.
Hurricane Ike resulted in a decrease of 3.6 million barrels per day of refinery capacity, the DOE stated. Meanwhile, 99.6% of crude production and 91.9% of natural gas production in the Gulf of Mexico was shuttered, as of Monday.