Oil at $40, and Below, Gaining Traction on Wall Street

January 15, 2015 06:28 AM
Oil at $40, and Below, Gaining Traction on Wall Street

Brace for $40-a-barrel oil.

The U.S. benchmark crude price, down more than $60 since June to below $45 yesterday, is on the way to this next threshold, said Societe Generale SA and Bank of America Corp. And Goldman Sachs Group Inc. says that West Texas Intermediate needs to remain near $40 during the first half to deter investment in new supplies that would add to the glut.

“The markets are continuing to price in huge oversupply in the first half of 2015,” Mike Wittner, head of research at Societe Generale SA in New York, said by phone on Jan. 12. “We’re going to go below $40.”

Oil is seeking a “new equilibrium” as the Organization of Petroleum Exporting Countries abandons its role of keeping supply and demand aligned, according to Goldman. Prices are poised to drop further, testing the ability of U.S. shale drillers to keep pumping.

WTI fell as low as $44.20 a barrel on the New York Mercantile Exchange yesterday and closed today at $48.48. The U.S. benchmark has dropped 10 percent this month, extending a 46 percent plunge last year that was the worst since the 2008 financial crisis.

OPEC Strategy

OPEC is trying to maintain its share of the global oil market against the rise of U.S. output. United Arab Emirates Energy Minister Suhail Al Mazrouei reiterated yesterday that shale producers will capitulate before OPEC to lower prices, the latest in more than a dozen comments from Gulf members aimed at hastening oil’s slide and lowering non-OPEC supply. The group upheld its target of 30 million barrels a day at a meeting in Vienna on Nov. 27.

The rout may continue to $35 a barrel in the “near term” because both oil supply and demand will have a delayed reaction to falling prices, Francisco Blanch, head of commodities research at Bank of America in New York, said in a report on Jan. 6.

The U.S. is pumping oil at the fastest pace in more than three decades, helped by a drilling boom that’s unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota. U.S. output expanded to 9.14 million barrels a day in the week ended Dec. 12, the most since at least 1983, according to the U.S. Energy Information Administration.

Reducing Investment

With Saudi Arabia and other OPEC nations no longer fine- tuning supply, reductions in investment in new production will be the instrument for removing excess output, Jeffrey Currie, head of commodities research in New York at Goldman said in a report on Jan. 11. This means the collapse will be deeper and the recovery slower than in previous slumps, he said.

Operating cash costs for many non-OPEC projects are below $40 a barrel and some producers will be able to keep going because they have locked in forward prices, or are supported by tax breaks or weaker domestic currencies, said Blanch, who on Nov. 27 predicted that WTI, then above $70 a barrel, could plunge to $50. An increase in demand in response to lower prices will take about six months, he said.

“An impatient oil market, wanting to see production adjustments as soon as possible, could push WTI oil prices to $40 a barrel,” Giovanni Staunovo, an analyst at UBS AG in Zurich, said by e-mail yesterday. Investment “cutbacks and less drilling activity are required to see a stall in North American supply growth. This is unlikely to happen in a meaningful way before the second half,” he said.

Cutting Supply

While U.S. drilling activity has slowed down in response to the price plunge, it will take months for that to translate into lower supplies, according to Societe Generale’s Wittner. Rigs seeking oil in the U.S. decreased by 61 to 1,421, Baker Hughes Inc. said Jan. 9. That’s the largest drop since February 1991.

“Rig counts are coming down, so it is happening the way it’s supposed to happen,” Wittner said. “But it’s going to take a while to see an impact on shale oil.”

A seasonal lull in demand this quarter will add to the downward pressure from brimming inventories, pushing down prices as much as another $10 a barrel, Amrita Sen, chief analyst at London-based consultant Energy Aspects Ltd. said in an interview on Bloomberg Radio’s “Surveillance” on Jan. 12.

“There is likely to be another leg lower for prices,” said Sen. “I wouldn’t rule out a peek into the $30s.”


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Spell Check

Center, OK
1/15/2015 12:13 PM

  Enjoy it while it lasts, it's going to be fairly short-lived for a number of reasons including, but not limited to: Global oversupply approximates seasonal market variation. All of OPEC's spare capacity, if the optimistic estimates of its extent are correct and if brought online immediately, would only offset about a year's increase in demand. Shale production is accompanied by a terrifying decline curve; e.g., the best US field, Eagle Ford, loses about 7% liquid produciton and about 4% gas production from existing wells every *month*, others don't differ materially. All net global production increases over the past decade were from unconventional (horizontal / shale, deepwater and tar sands) sources and, when hedges and already in-place financing runs dry (perhaps as long as a year), no one will bring new resources of those sorts online until prices stabilize well above operational break-even. Note that the rig count in Saudi Arabia doubled late last year. Likely outcome when the dust clears in a year or two: average prices won't differ materially from what they've been for a couple of years now; the highest cost marginal producers (horizontal / shale, tar sands & deepwater) will still exist and will remain the marginal global suppliers necessary to prevent price hikes, and Saudi production will spike leaving them with a larger share of the global pie while squeezing some North American producers out.

Roger Plafkin
Ada, MI
1/15/2015 06:45 PM

  Now is the time to convert people to Natural Gas to run their vehicles; if you have a Phillips unit on your house, you can fill your car for 88cents a gallon overnight. Also, now is the time to promote alternative energy even more--Solar on every home and building in America; wind on every farm, building, school campus, and wherever else that it is possible to install wind turbines. We can do it if we all get behind the project. Roger Plafkin Plafkin Farms, View on Photobucket.com and Webshots.com Ada, Michigan 49301 1-616-676-0590 plafkin@juno.com

Leonard Blanchard
Orangeburg, SC
1/15/2015 08:45 AM

  I liked this article because it was not full of a bunch of B.S. about this and that reason for why the oil price is down. Simple supply and demand is the reason for this huge drop in oil prices and OPEC is not able to manipulate the supply like they want to . The big problem I have is that oil companies can still make money at the 40 buck range which shows how bad they are busting our butts when it is $100 plus a barrel . With 4 cars on the road in my family $2.00 a gal. gas vs. $4.00 a gal gas sure puts money back in my wallet giving my budget some relief and a few coins to spend on something else which helps local businesses and restaurants a little bit. People do have short memories though and think this cheap oil will last for ever. Remember all the gas guzzlers on the lots when the oil companies discovered the consumer would actually pay $4 bucks for a gallon of gas. One hurricane and some refinery issues opened their greedy eyes and they never looked back . Aided by a economic boom in China creating another huge gas need furthered the oil companies ability not to over supply the demand . Now as the cycle has reversed the trend American families are finally getting some relief right now with what should be long term reasonably cheap energy in oil . It will not last for sure but in spite of what reasons all the experts will spew out of their mouths it will be simply when the supply falls short of the demand -LB-


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