Oil Slump Blindsides Bulls That Wagered on Rout Ending: Energy
Speculators added to wagers that the slump in oil futures, the worst since the global recession, is ending. Prices kept falling anyway.
Money managers raised their net-long position in U.S. crude to the highest in two months in the week ended Dec. 9, U.S. government data show. Most of the change came from short holdings contracting to the lowest level since August.
Oil fell to a five-year low last week after OPEC producers including Kuwait and Iraq reduced prices and the International Energy Agency cut its estimate for global demand for the fourth time in five months. Saudi Oil Minister Ali Al-Naimi indicated he won’t trim supply, reiterating OPEC’s decision last month to leave the group’s production target unchanged even as the U.S. pumps the most oil in more than three decades.
Oil Prices
“A number of investors think we’re close to the bottom,” Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts, said by phone Dec. 12. “It’s always difficult to get the timing right.”
WTI sank $3.06, or 4.6 percent, to $63.82 a barrel on the New York Mercantile Exchange during the CFTC report period. The U.S. benchmark fell $1.90, or 3.3 percent, to $55.91 a barrel today, the lowest settlement since May 2009. Brent dropped 1.3 percent to end the session at $61.06 a barrel, the lowest close since July 2009.
Photographer: Essam al-Sudani/AFP/Getty Images
An engineer is seen at the Zubair oil field in southern Iraq. OPEC’s three largest... Read More
Shares outstanding of the four biggest U.S. exchange-traded funds that follow oil prices, including the United States Oil Fund (USO) and ProShares Ultra Bloomberg Crude Oil, increased to 96 million on Dec. 11, the most since January 2013, according to data compiled by Bloomberg.
Deep Discounts
Investors added $264.5 million into the four funds so far this month, following a $559.85 million inflow in November that was the most since June 2012.
“This shows that there’s a lot of skepticism about the selloff and a feeling that prices should soon rebound,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Dec. 12. “We’re seeing bargain hunting by investors of all stripes.”
OPEC’s three largest members, Saudi Arabia, Iraq and Kuwait, are offering oil to Asian buyers at the deepest discounts in at least 6 years. “Why should I cut production?” Ali Al-Naimi, Saudi Arabia’s oil minister, said in response to reporters’ questions Dec. 10 in Lima, where he’s attending United Nations climate talks.
The U.S. pumped 9.12 million barrels a day in the period ended Dec. 5, the most in weekly Energy Information Administration started in 1983. The gain came as horizontal drilling and hydraulic fracturing unlocked supplies from shale formations.
Demand Projections
“We’ll have to see who blinks first, the Saudis and OPEC or U.S. shale producers,” Joe Quinlan, chief investment strategist at Bank of America Corp.’s U.S. Trust, which oversees about $380 billion, said by phone Dec. 12. “Saudi Arabia is fighting for market share.”
Oil fell last week as the IEA, OPEC and EIA reduced their estimates of global fuel consumption next year. The Paris-based IEA’s 2015 projection was trimmed by 230,000 barrels from last month, according to a Dec. 12 report.
The net-long position in WTI rose by 6,894 contracts to 191,268 futures and options in the week ended Dec. 9, the most since Oct. 7, U.S. Commodity Futures Trading Commission data show. Short positions decreased 8.5 percent while long positions increased 0.3 percent.
For Brent crude, hedge funds and other money managers raised bullish bets 10 percent to 107,287 contracts in the week ended Dec. 9, according to data from the ICE Futures Europe exchange. It was the highest level in four months.
In other markets, bullish bets on gasoline advanced 13 percent to 48,813 contracts, the most since July. Futures decreased 4.9 percent to $1.7236 a gallon on Nymex in the reporting period.
Gasoline Prices
Retail gasoline, averaged nationwide, slid to $2.545 a gallon yesterday, the lowest since May 2009, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.
Bearish wagers on U.S. ultra low sulfur diesel increased 12 percent to 22,702 contracts. The fuel slipped 3.3 percent to $2.084 a gallon in the report week.
Net-long wagers on U.S. natural gas fell 28 percent to 42,663 lots, the lowest since October. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract.
Nymex natural gas dropped 5.7 percent to $3.652 per million British thermal units during the report week.
Crude production will have to drop before prices rise significantly, according to Katherine Spector, a commodities strategist at CIBC World Markets Inc. in New York.
The IEA boosted projections for supplies outside OPEC in 2015 by 200,000 barrels a day. U.S. production will expand by 685,000 barrels a day, the agency said.
“Supply is what gave us high prices the last few years and it’s what’s behind the drop now,” Spector said by phone Dec. 12. “Production is the bigger element.”
For Related News and Information: Oil Demand Outlook Cut Again as Sub-$60 Price Seen Holding U.S. Cuts Oil Price Projection on OPEC Decision, Output Gain U.S. Refineries Increase Oil Use to Record as Prices Plunge
Brent Seen Falling to $50 in 2015 as OPEC Fails to Act
Crude oil prices are poised to fall below half where they were six months ago, before producers begin dealing with a global glut.
Brent, the global benchmark, will slide to as low as $50 a barrel in 2015, according to the median in a Bloomberg survey yesterday of 17 analysts, down from the $115.71 a barrel high for the year on June 19. The grade has already collapsed 47 percent since then and needs to fall further before producers clear the current glut, said five out of six respondents who gave a reason.
Brent futures sank to a five-year low yesterday, two weeks after the Organization of Petroleum Exporting Countries decided to maintain output even as the highest U.S. production in three decades swells a global surplus. The organization will stand by its decision even if prices fall to $40, United Arab Emirates Energy Minister Suhail Al-Mazrouei said the day before.
“This won’t stop until oil producers are on their backs,” Bjarne Schieldrop, chief commodities analyst at SEB AB, Sweden’s fourth-biggest bank, said by phone from Oslo yesterday. “There will be better demand in the second half, hopefully some demand effects from lower prices, and definitely softer growth in U.S. shale.”
Brent futures slipped 79 cents, or 1.3 percent, to end at $61.06 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since July 2009.
Negative Effect
The group decided at the Nov. 27 meeting to keep output unchanged to protect OPEC’s market share, even if it has a negative effect on crude prices, the official Kuwait News Agency reported, citing Oil Minister Ali al-Omair.
The U.S. pumped 9.12 million barrels a day in the period ended Dec. 5, the most in weekly Energy Information Administration started in 1983. The gain came as horizontal drilling and hydraulic fracturing unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota.
Some respondents project the floor may be close to current levels. Drilling activity in the U.S. is showing some signs of slowing, which may grow as financing becomes more difficult, according to Saxo Bank A/S in Copenhagen. Output in some OPEC members outside the Persian Gulf will suffer before U.S. shale drillers curb operations, consultant Petromatrix GmbH predicts.
“OPEC has scored an own-goal,” Olivier Jakob, Petromatrix’s managing director, said by e-mail. “Non-Gulf OPEC countries will participate against their will in the supply re-balancing of 2015. Venezuela will fall before the Bakken does.”
Nigeria’s Oil Unions Continue Strike That May Curtail Exports
Nigeria’s two oil unions entered the second day of an indefinite strike that they say will curb exports from the West African nation responsible for pumping more than a quarter of the continent’s crude.
“You will soon begin to see shutdowns of our oil flow,” Emmanuel Ojugbana, a spokesman of the Petroleum and Natural Gas Senior Staff Association of Nigeria, said yesterday by phone. Ohi Alegbe, an Abuja-based spokesman for the Nigerian National Petroleum Corp. and the Oil Ministry, declined to comment on exports.
Any reduction in pumping would coincide with a collapse in the price of Nigeria’s biggest source of revenue. Brent crude oil plunged 44 percent this year. It rose as much as 2.3 percent to $63.25 a barrel in London today. Nigeria needs about twice that to balance its budget, according to estimates in October from Deutsche Bank AG.
“We do not expect the strike to have a material impact on Nigeria’s oil production, certainly not in the early days,” Philippe de Pontet, New York-based Eurasia Group’s Africa director, said in an e-mailed statement yesterday. “The unions are taking advantage of the political climate ahead of general elections in February to maximize their negotiating leverage on a set of unrelated matters.”
The action involves both Pengassan, as the managerial union is known, and the Nigerian Union of Petroleum and Natural Gas Workers, or Nupeng, its affiliate for manual workers. Nigeria’s crude oil output declined 3.2 percent when they last went on strike in September, data compiled by Bloomberg show. Nigeria pumped 2.3 million barrels of crude oil a day last year, 26 percent of Africa’s total output, according to BP Plc estimates.
Refinery Fix
“If the strike is allowed for another few days, I can assure you that there will be complete shutdown because this is an indefinite strike,” Ojugbana said today from Warri, a southern oil hub.
The action is to protest government failure to fix refineries, cut gasoline prices in line with the slump in crude, and also to press for the passage of a new oil law, according to an e-mailed statement from Pengassan.
Domestic supply won’t be affected, with about 17 fuel tankers waiting to unload at the port of Lagos, NNPC’s Olegbe said in an e-mail.
The strike “will not dislocate the robust distribution and sale of fuel to members of the public,” Olegbe said. The nation has about a month’s supply of oil products in stockpiles, he said.
Workers at oil fields and those operating flow stations that pump crude to export terminals are joining the strike, meaning a protracted action could disrupt exports, Ojugbana said. Domestic gasoline supplies may also be curtailed, Pengassan said.
The two unions want the authorities to expedite passage of the petroleum industry bill, curtail crude theft and pipeline sabotage, and address what they say are unfair labor practices by some energy producers, according to its statement.
The West African nation relies on crude for about 70 percent of government revenue and 95 percent of foreign exchange income.
“The strike will not be suspended until there is strong commitment from the government and affected operators to resolve the issues,” Ojugbana said.
Oil Sands Output Rises as Canadian Crude Falls Below $40
Canadian heavy crude traded below $40 a barrel for the first time in five years just as surge of new projects are scheduled to start operation.
A total of 14 new oil sands projects are scheduled to start next year with a combined capacity of 266,240 barrels a day, according to data published by Oilsands Review. That’s 36 percent more than was started in 2014.
Oil futures have dropped more than 40 percent since June as production surged in the U.S. and Canada, adding to OPEC output that exceeded the group’s target for six consecutive months. OPEC decided to maintain its production level at a Nov. 27 meeting, resisting calls from members including Venezuela to reduce supply.
“There is a lot of crude coming on next year,” Juan Osuna, IHS Energy Inc.’s senior director for North American oil said in a phone interview Dec. 12. Producers “aren’t going to be happy, they will make a greater effort to cut costs, but they have been prepared for this.”
Western Canadian Select fell to $38.81 a barrel at 3:58 p.m. New York time, the lowest since April 2009, according to data compiled by Bloomberg. The grade, which has higher sulfur content than U.S. benchmark West Texas Intermediate, sold at an average $18.78 a-barrel discount in the past year, according to data compiled by Bloomberg.
Oil sands projects slated to start next year include ConocoPhillips and Total SA’s joint 118,000 barrel a day Surmont project and the 40,000-barrel-a-day expansion of Cenovus (CVE) Energy Inc.’s Foster Creek project, according to Oilsands Review data.
Sunrise Project
Husky Energy Inc. said last week it began steam operations on its Sunrise crude project with the first phase set to begin pumping oil by early next year.
While oil sands producers may curtail future development, most existing operations won’t be shut and ones under construction will go ahead because of the investments involved and potential harm to future output, Osuna said.
Cenovus said Dec. 11 production would rise 9 percent to 129,000 barrels a day from its Foster Creek and Christina Lake projects next year even as it lowered its spending plan by about 15 percent.
Canada’s oil sands output is projected to rise to 3.7 million barrels a day by 2020 from 1.98 million last year, according to a report last month by the Canadian Energy Research Institute.
Brent oil traded sank 79 cents to $61.06 a barrel today as the United Arab Emirates said the Organization of Petroleum Exporting Countries will resist output cuts even if prices slump as low as $40.
Oil Rigs
U.S. rigs targeting oil dropped by 29 last week to 1,546, the lowest level since June and the biggest decline since December 2012, Houston-based field services company Baker Hughes Inc. said on its website Dec. 12. Canadian oil rigs increased by 3.
“The market is oversupplied,” Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo said by phone. “Prices are falling and no one knows where the price floor is, however, we see some signs that investment in oil rigs in the U.S. is slowing.”
Profitability for all but the lowest-cost oil sands producers will be squeezed, Patricia Mohr, an economist at Bank of Nova Scotia in Toronto, said in a note last month.
Cenovus said last week it “substantially” slowed development plans at the Narrows Lake oil sands project. Canadian Natural Resources Ltd. may trim spending if oil prices approach $70 a barrel and stay there, President Steve Laut said in an interview last month.
Canadian Producers
Canada’s oil-sands producers will probably be the first to cut output amid falling prices, Greg Sharenow, executive vice president of Pacific Investment Management Co. said this month.
Canadian crude produced from oil sands is some of the world’s most expensive to produce as it must be dug or pumped from the ground, turned into lighter synthetic crude and then transported by pipeline or rail thousands of miles to refineries.
“There will be moments when all the bitumen production will be under pressure, but we think Canadians can survive that,” he said. “Most oil sands projects are not built to be amortized in one year.”
Goldman Sees U.S. Oil Output Unscathed as Costs Decline
U.S. producers battling OPEC for market share may increase output further from the highest rate in more than three decades as costs decline almost as fast as oil prices, according to Goldman Sachs Group Inc.
The slump in benchmark U.S. crude futures, which are down more than 40 percent this year, is driving producers to move drill rigs to lower-cost fields, the bank said in an e-mailed report today. While there’s evidence of some rebalancing starting to occur in the market, that isn’t sufficient, it said.
A decision last month by the Organization of Petroleum Exporting Countries to maintain its output target prompted speculation that the group is willing to let crude slide to a level that would slow U.S. production. Smaller member-nations including Venezuela, which have called for action to support prices, may play a role in rebalancing the market, Goldman said.
“Costs are falling nearly as fast as the price, which means oil producers can spend less to get the same or potentially even more in terms of production,” the bank said. “While reductions in capex are coming faster than expected, it is unlikely to translate into less supply” it said, adding that drill-rig rates have dropped as much as 20 percent.
ConocoPhillips, the third-largest U.S. energy producer, cut its capital expenditure by about 20 percent for next year amid the price slump driven by horizontal drilling and hydraulic fracturing that have opened up shale formations.
Rig Count
West Texas Intermediate for January delivery fell $2.14 to $57.81 a barrel on the New York Mercantile Exchange on Dec. 12, the lowest close since May 2009. It was at $58.24 in electronic trading at 11 a.m. London time today.
While data from Baker Hughes Inc. shows U.S. producers idled the most rigs in two years last week, this count was almost entirely for vertical machines, not the horizontal drillers used for shale output, according to Goldman.
OPEC will stand by its decision not to cut output even if oil drops to as low as $40 a barrel and will wait at least three months before considering an emergency meeting, United Arab Emirates Energy Minister Suhail Al-Mazrouei said yesterday at a conference in Dubai. The 12-member group maintained its collective target of 30 million barrels a day at a Nov. 27 meeting in Vienna.
‘New Normal’
WTI will average $70 to $75 a barrel next year and Brent, the European benchmark grade, will trade at $80 to $85 in London, Goldman reiterated on Nov. 27.
Crude price forecasts that are based on outdated cost data create a further downside risk because those expenses are shifting as fast as oil prices, according to the bank. The market view that the market can rebound “not only suggests that oil prices can go lower for longer, but also that the new normal is far lower than we thought just one month ago,” it said today.
In the three geologic formations that account for 88 percent of U.S. shale oil output -- North Dakota’s Bakken and the Eagle Ford and Permian in Texas -- explorers can drill new wells profitably in some areas even if crude falls to $25 a barrel, according to ITG Investment Research Inc.
Oil collapse: Why oil is down by half, and what it means for you
THE price of oil has fallen by nearly half in just six months, a surprising and steep plunge that has consumers cheering, producers howling and economists wringing their hands over whether this is a good or bad thing.
The price of a barrel of oil is just under $US58, down from a summer high of $107, and lower than at any time since the US was still in recession in the spring of 2009.
So what’s going on? A global imbalance of supply and demand that is rippling across the world economy, for better and worse.
SUPPLIES GO BOOM
Years of high oil prices, interrupted briefly by the recession, inspired drillers around the world to scour the earth’s crust for more oil.
They found it.
Since 2008 oil companies in the US, for example, have increased production by 70 per cent, or 3.5 million barrels of oil per day. To put that in perspective, that increase alone is more than the production of any OPEC member other than Saudi Arabia.
As US production was ramping up, turmoil in the Middle East and North Africa reduced supplies from Libya, Iran and elsewhere. A balance was struck: Increasing supplies from outside of OPEC and from Iraq’s recovering oil industry helped meet rising demand around the world as other OPEC supplies wavered.
But now those OPEC supplies look more certain despite continuing turmoil, and those non-OPEC supplies have swamped the market. OPEC estimated last week that the world would need 28.9 million barrels of its oil per day next year, the lowest in more than a decade. At the same time, OPEC countries plan to produce 30 million barrels of oil per day next year. That supply surplus is sending global prices lower.
Drillers around the world scoured earth’s crust for more oil this year. They found it.
Drillers around the world scoured earth’s crust for more oil this year. They found it.
DEMAND GOES BUST
Global demand is still expected to grow next year, but by far less than many thought earlier this year. The economies of China, Japan and Western Europe — the top oil consumers after the United States — all appear to be weakening. Oil demand falls when economic growth stalls.
The U.S. is still the world’s largest consumer, but more fuel-efficient cars and changing demographics mean demand for oil and gasoline is not increasing. The Energy Department predicts a slight decrease in gasoline demand next year even though the price is expected to be sharply lower and the economy is expected to grow.
THE HAPPY CONSUMERS
For drivers, shippers, airlines and other consumers of fuel, there’s nothing not to like about the drop in oil prices.
The national average gasoline price has fallen for 81 straight days to $2.55 a gallon, its lowest level since October of 2009, according to AAA. It’s $1.15 a gallon cheaper than its high for the year, saving US households $100 a month as they shop for holiday presents. “Any time gas prices go down that is a good thing,” said Randy Daniels, 30, who was shopping recently at the Lenox Square Mall in Atlanta. “An extra 20 or 30 bucks in my pocket goes far.”
Diesel and jet fuel prices have also plunged, helping boost the profits and share prices of airlines and shippers. Heating oil is the cheapest it has been in four years, reducing home heating prices just in time for winter for many in the chilly Northeast.
For drivers, shippers and airlines, there’s nothing not to like about the drop in oil pri
For drivers, shippers and airlines, there’s nothing not to like about the drop in oil prices.
THE WORRIED ECONOMISTS
Falling fuel prices act like a tax cut and help boost consumer spending, which in turn accounts for 70 per cent of the US economy. But economists are growing concerned that there are other, more troublesome forces at play.
The depth of oil’s plunge could be a signal that the global economy is struggling even more than economists think. A weak global economy could hurt the US economy by reducing exports, employment and spending, which together could outweigh the economic benefits of cheaper fuel.
THE PRODUCERS’ PAIN
For oil companies, oil-producing states, and oil-exporting countries, the oil price collapse is painful.
Oil companies generally keep producing oil from wells they’ve already drilled, but lower prices sharply reduce revenue and force them to cut back spending on new exploration projects. BP announced last week it would try to trim $1 billion in spending next year in a move that analysts say could result in thousands of job cuts.
States that rely on taxes from energy production such as Alaska, North Dakota, Oklahoma and Texas will see lower revenues and some have already had to trim budgets.
Major oil exporters such as Iran, Iraq, Russia and Venezuela rely heavily on revenues from state-owned oil companies to run their governments and are struggling under major budget shortfalls. For example, Bank of America estimates that every $1 drop in the global price of oil costs Venezuela $770 million in annual revenue. Current prices are now $46 below last year’s average, putting the country on pace for a $36 billion reduction in revenue.
