down and down the spiral goes
Jan. 5 (Bloomberg) – Benchmark U.S. oil prices dropped below $50 a barrel for the first time since April 2009 as surging supply signaled that the global glut that drove crude into a bear market will persist.
West Texas Intermediate slid 5 percent in New York while Brent fell below $55 in London for the first time since May 2009. Russia’s output rose to a post-Soviet high while Iraq, the second-largest producer in OPEC, plans to boost crude exports to a record this month. The price drop accelerated as the dollar climbed against the euro amid investor concern Greece might leave the currency union
“The market is continuing to price in weak fundamentals in the first half of this year,” Mike Wittner, head of oil research at Societe Generale SA in New York, said by phone. “There’s also been a return to risk aversion because of Greece, something we haven’t seen in a while.”
Brent slumped 48 percent last year, the most since the 2008 financial crisis, as the Organization of Petroleum Exporting Countries resisted calls to cut output amid a battle with U.S. shale producers for market share. The 12-member group pumped above its target for a seventh straight month in December, according to a Bloomberg survey.
West Texas Intermediate for February delivery dropped $2.65 to $50.04 a barrel on the New York Mercantile Exchange. It was the lowest settlement since April 28, 2009. Prices slipped as much as 5.5 percent to $49.77 during trading. The volume of all futures traded was 11 percent higher than the 100-day average at 2:54 p.m.
Brent for February settlement declined $3.31, or 5.9 percent, to end the session at $53.11 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since May 1, 2009. Volume for all futures traded was 40 percent above the 100-day average. The European benchmark closed at a $3.07 premium to WTI.
“Everyone is looking for the bottom,” Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts, said by phone. “We’ve already dropped below what would be justified by fundamentals. Brent should find support around the $58 to $60 area given supply and demand.”
Iraq plans to expand crude exports to 3.3 million barrels a day this month, Asim Jihad, a spokesman at the Oil Ministry in Baghdad, said by phone yesterday. The country exported 2.94 million a day in December, the most since the 1980s, he said.
Russian oil production rose 0.3 percent in December to a post-Soviet record of 10.667 million barrels a day, according to preliminary data published Jan. 2 by CDU-TEK, part of the Energy Ministry.
“This bearish market is being fed by a combination of surging supply and shaky demand,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “We now have Russian production at a post-Soviet high and the Iraqis planning to add even more supply to the market. This just adds to negative market sentiment.”
Saudi Arabia narrowed discounts in its official February crude selling prices to buyers in Asia to $1.40 a barrel below the average of Middle East benchmark Oman and Dubai grades.
The world’s biggest oil exporter offered its Arab Light grade at the greatest discount in at least 14 years for January. That move was followed by Iraq, Kuwait and Iran, prompting speculation that Middle East producers were protecting market share.
The oil market is set for “more problems” this year as increasing supplies add to the global glut, according to Morgan Stanley. Output may rise in West Africa and the Americas in addition to more shipments from Russia and Iraq, offsetting concerns of reduced Libyan production, analysts including New York-based Adam Longson said in an e-mailed report today. Iran may boost exports by about 500,000 barrels a day if western sanctions against it are lifted, the analysts said.
Brent will trade at $80 a barrel this year, down from an earlier estimate of $104, amid gains in global spare capacity and rising inventories, Sanford C. Bernstein said in an e-mailed report today.
U.S. crude output rose to 9.14 million barrels a day in the week ended Dec. 12, the most in Energy Information Administration weekly data that started in January 1983. Production will climb to an average 9.32 million this year, the EIA said Dec. 9 in its monthly Short-Term Energy Outlook.
“We’re still focused on U.S. production,” Kyle Cooper, director of commodities research at IAF Advisors in Houston, said by phone. “Production is going to rise during the next six months as projects that are already underway reach completion.”
The euro dropped as far as $1.1864, the lowest in almost nine years. A stronger U.S. currency usually reduces the appeal of commodities as a store of value.
“The euro is getting trounced on the Greek news today,” Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, said by phone. “There’s a very strong correlation between dollar strength and oil prices. The dollar is very strong right now.”
The EIA is projected to report Jan. 7 that U.S. supplies of crude, gasoline and distillate fuel, a category that diesel and heating oil, rose last week, according to a Bloomberg survey.
Gasoline futures declined 5.2 cents, or 3.6 percent, to $1.3814 a gallon, the lowest settlement since April 1, 2009. Diesel decreased 4.65 cents, or 2.6 percent, to close at $1.7492, the least since Sept. 29.
Regular gasoline at U.S. pumps fell to the lowest level since May 2009. The average retail price slipped 1 cent to $2.199 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group. Pump prices were around $2.05 a gallon when oil was last below $50 a barrel.
“This bearish syndrome will continue until the drop in prices either stimulates economic growth or there is a supply response,” Kilduff said.
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and then there is this
By Joe Carroll Jan 5, 2015 2:24 PM PT
Tumbling crude prices will trigger a flood of oilfield writedowns starting this month after industry returns slumped to a 16-year low, calling into question half a decade of exploration.
With crude prices down more than 50 percent from their 2014 peak, fields as far-flung as Kazakhstan and Australia are no longer worth pumping, said a team of Citigroup Inc. © analysts led by Alastair Syme. Companies on the hook for risky, high-cost projects that don’t make sense in a $50-a-barrel market include international titans such as Royal Dutch Shell Plc (RDSA) and small wildcatters like Sanchez Energy Corp.
The impending writedowns represent the latest blow to an industry rocked by a combination of faltering demand growth and booming supplies from North American shale fields. The downturn threatens to wipe out more than $1.6 trillion in earnings for producing companies and nations this year. Oil explorers already are canceling drilling plans and laying off crews to conserve cash needed to cover dividend checks to investors and pay back debts.
“The mid-cap and small-cap operators are going to be hardest hit because this is all driven by their cost to produce,” said Gianna Bern, founder of Brookshire Advisory and Research Inc., who also teaches international finance at the University of Notre Dame.
An index of 43 U.S. oil and gas companies lost about one-fourth of its value since crude began its descent from last year’s intraday high of $107.73 a barrel on June 20. The price dipped below $50 on Jan. 5, the lowest since April 2009. The decline represents a $4.4 billion drop in daily revenue for oil producers, which equates to $1.6 trillion on an annualized basis, Citigroup researchers led by Edward Morse said in a Jan. 4 note to clients.
The oil-market rout is exposing projects dating as far back as 2009 that were either poorly executed or bad ideas to begin with, Syme’s team said in a note to clients. Shell, Europe’s largest energy producer, may have as much as 5 percent of its capital tied up in money-losing projects. For U.K.-based BG Group Plc (BG/), the figure could be as high as 8 percent, according to the Citi analysts.
The biggest swath of asset writedowns probably will happen among U.S. explorers such as Sanchez, Matador Resources Co. (MTDR) and Clayton Williams Energy Inc. (CWEI) that don’t have the same financial discipline as bigger producers such as Marathon Oil Corp., Bern said.
Houston-based Sanchez fell 12 percent Jan. 5 in New York trading, bringing its one-year decline to 66 percent. Matador, based in Dallas, dropped by 8.5 percent and Midland, Texas-based Clayton Williams declined by 7.8 percent.
“Impairments are unavoidable,” said Mark Sadeghian, an energy-industry analyst at Fitch Ratings Ltd. in Chicago.
The writedowns that occur will be in the form of asset impairment charges related to the declining worth of specific oilfields, rather than wholesale reductions in proved reserves, Sadeghian said. Investors are less inclined to punish oil companies for impairment charges than they would for a drop in reserve volumes, said Gabriele Sorbara, an analyst at Topeka Capital Markets Inc. in New York.
Citi expects Brent crude, an international crude benchmark, to average $62 this year, cutting earnings per share for major oil companies by an average of 29 percent through 2017 and increasing pressure to postpone some drilling.
For the biggest U.S. and European petroleum producers, return on equity – a measure of how profitably earnings are reinvested – has fallen to an average of 7.5 percent, the lowest since the fourth quarter of 1998, according to Syme’s team.
That’s triggering a cascade of spending cuts from Dallas to London that could boost return-on-equity for the group to an average of 11.5 percent within three years, Syme’s group said.
The oil industry may cut spending on offshore platforms, refinery upgrades and other capital projects by 20 percent this year, according to Sanford C. Bernstein analyst Oswald Clint in a Jan. 5 report. This will mean less funds for refining and “more shuttering of underperforming European assets should be expected in 2015.”
The major international explorers such as Exxon Mobil Corp. and Chevron Corp. (CVX) are unlikely to incur any significant impairment charges unless crude prices continue falling and remain depressed for an extended period, Bern said.
The oil-market slump still hasn’t reached the depths of the 2008 rout that accompanied the worldwide financial crisis, she said. Back then, West Texas Intermediate crude dropped from $147.27 to $32.40 – a 78 percent decline – in a five-month span. A commensurate fall from last year’s peak would entail reaching a nadir of $23.70.
“You’d look for a longer, more sustained decline before the Marathons and ConocoPhillips and Exxons of the world start to revisit asset valuations,” Bern said.