Crude Below $36:Amazing but Confusing

Crude oil fell below $36 a barrel for the first time since June 2004 as declining demand created a glut of crude and the weakening economy undermined OPEC’s efforts to reduce supply.

Oil for delivery in future months has dropped less than the contract for January as supply has swollen in the storage hub for crude traded in New York. The U.S. Energy Department said consumption will be lower in 2009 because of the recession. OPEC agreed to reduce output by 2.46 million barrels a day yesterday.

“There’s a lot of supply and not a lot of storage left,” said Adam Sieminski, Deutsche Bank’s chief energy economist, in Washington. “There’s a hope somewhere that the economy will be better in 12 months and the OPEC cuts will start to have their intended impact.”

Crude oil for January delivery dropped $3.84, or 9.6 percent, to $36.22 a barrel at 2:47 p.m. on the New York Mercantile Exchange, the lowest settlement since June 29, 2004. Futures touched $35.98 during today’s session. Prices have tumbled 75 percent from a record $147.27 on July 11. The January contract expires tomorrow.

February futures cost $5.45 a barrel more than January oil today, based on Nymex settlement prices. It’s the biggest premium between the two most-active contract months in Bloomberg data going back to 1986. The spread allows oil traders who can line up credit and storage space to lock in profits by buying and holding crude oil to sell a month from now.

Oil Contango

Oil for delivery in January 2010 is 53 percent more than for delivery in January 2009, increasing the opportunity for traders to profit. This price structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

Contango trading encourages companies to increase stockpiles. U.S. crude-oil supplies rose in 11 of the past 12 weeks, according to the DOE. Inventories at Cushing, Oklahoma, where oil that’s traded on Nymex is stored, climbed 21 percent to 27.5 million barrels last week, the highest since May 2007, the government said yesterday.