Oil's rout deepest in 16 yrs
Singapore - Oil prices have fallen as much as $16 from their peaks, their steepest reversal in 16 years, in a correction that traders say may be harder to shake off than past setbacks over the market's four-year rally.
In real terms Brent has fallen $16.02 since it hit a high of $78.65 on August 8 - its biggest decline from peak to trough since prices fell just ahead of the first Gulf War in late 1990.
Brent is down more than 20% from its peak, meeting the technical criteria for the start of a bear market.
US crude has dropped nearly $15 to hit a near six-month low of $63.53 a barrel on Wednesday, a fall only a hair smaller than those in August-November 2005 and October-December 2004.
In those cases, oil recovered to make new highs within five and eight months, respectively.
Lasting setback?
In percentage terms there have been bigger stumbles on oil's recent ascent, propelled steadily higher since 2002 by the war in Iraq, soaring Chinese demand, constrained oilfield and refinery production, devastating US Gulf Coast hurricanes, and most recently fears of a disruption to Iran's exports.
But some say this setback may prove more lasting.
"Even though we've retraced certain percentages similar to this, it definitely seems that the market is different now," says New York-based ABN AMRO broker John Brady.
"Other times I saw (the corrections) leading to great buy opportunities, but I don't necessarily think that this time."
Technical analysts who study past price action for future direction, say the drop through the 200-day moving average last week and this week's fall below a three-year trend line - intact since mid-2003 - both send worrying signals.
Limits on investor influx
They say that the global environment is different than two or three years ago, when central banks were aiding liquidity with low interest rates and investors were seeking alternatives to sluggish equity and fixed-income markets.
Tighter conditions from Japan to the US may now limit the kind of investor influx that helped oil get back on track in each of the market's past corrections, while economic growth appears to be slowing, not accelerating.
Lastly the market has been in a contango structure for nearly two years, forcing the growing number of passive long-only investors to pay up each time they roll their positions forward - a potential deterrent for investing more.
While many analysts say the worst may not be over yet in the latest shake-out, most also agree that there remains scope for another attempt at surpassing the previous summit.
"If the fall is fast enough and hard enough, then there's momentum selling on the other side - that can have a sustained influence on prices, weeks or months," says Tobin Gorey, commodities strategist at the Commonwealth Bank of Australia.
"I do think this dip could well outdo those last two falls, but I don't think it destroys the story."
Past moves
Earlier this year, US crude fell 16.5% from January 23 to February 16 as the impact of new fund money faded and US supplies looked set to last out the winter.
Prices recouped their losses within two months as the Iran issue hotted up, Nigerian outages wore on and the summer loomed.
Previous corrections have taken much longer to fix.
Just as the rally got underway in 2003, oil prices slumped 31% from $39.99 a barrel (February 27) - the highest since the first Gulf War of 1990 - after the US invasion of Iraq appeared likely to be quick and spare harm to oilfields.
US prices took 14 months to reach a new high of $40, helped along by the dawning realisation that rapid economic growth in China was boosting oil demand far faster than expected, straining the world's producers and refiners.
Prices again spiralled lower after hitting $55.67 a barrel on October 25 2004, a peak helped by Hurricane Ivan, embarking on a 27.7% slump later linked to position unwinding as China Aviation Oil admitted to $550m in trading losses.
Within five months of the December 30 low at $40.25, however, they had risen back to record highs, thanks in part to Saudi supply cuts, a measure that oil traders now expect to come centre stage.
A year ago, prices soared to $70.85 a barrel as Hurricane Katrina smashed into the US Gulf Coast. But within three months, they had fallen by $15.40 a barrel as traders shifted focus to an anticipated drop to demand due to higher prices and a relatively mild winter across the United States.
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