Crude Extends Losses on Rising Inventories at Cushing

31 Dec 2014 | Author: | No comments yet »

Crude Extends Losses on Rising Inventories at Cushing.

NEW YORK—Brent oil futures, the global benchmark, are down about 50% for the year as plentiful supplies and tepid demand have sent prices plunging since June. Oil extended the largest annual decline since 2008 as the Energy Information Administration said crude stockpiles at Cushing, Oklahoma, fell last week.Falling oil prices are unlikely to make much of a difference to a continent economically marooned by bad policy and an increasingly fractious political environment. Weak Chinese economic data weighed on the market Wednesday, along with expectations that weekly U.S. inventory data could show that domestic supplies rose last week.

Inventories at the delivery point for New York Mercantile Exchange futures jumped 2 million barrels to 30.8 million, the most since February, the EIA said. Crude oil prices have fallen by about 45% this year, and the key benchmark prices – West Texas Intermediate (WTI or U.S. crude) and Brent – were down again Wednesday. US guidelines allowing overseas sales of ultralight oil without government approval may boost the country’s export capacity and “throw a monkey wrench” into Saudi Arabia’s plan to curb American output, according to Citigroup Inc. But the group, comprised of 12 oil producing nations, have shown reluctance to lower supply this year, fearing that its market share will be eroded by the increasing competition from U.S. suppliers. “The main reason for oil’s decline is OPEC sitting on the fence,” Giovanni Staunovo, an analyst at UBS AG in Zurich, told Bloomberg News. “To prevent an excessive inventory build-up, non-OPEC supply growth, particularly U.S. tight oil, needs to decelerate or stall temporarily.” Yet, for a change, I can genuinely claim to have got my main call for markets – that oil would sink to $80 a barrel or less – spot on, and for the right reasons, too.

Oil’s slump has roiled markets from the Russian ruble to the Nigerian naira and squeezed government budgets in producing nations including Venezuela and Ecuador. Just in case you think I’m making it up, this is what I said 12 months ago: “My big prediction is for $80 oil, from which much of the rest of my outlook for the coming year flows. Brent for February settlement fell $1.15, or 2 percent, to $56.75 a barrel on the London-based ICE Futures Europe exchange after touching $55.81, also the lowest since May 2009. Oil has slumped as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share amid a supply glut. It’s interesting to see whether OPEC will continue to take no action.” The U.S. oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota.

President Barack Obama’s administration opened the door for expanded oil exports by clarifying that a lightly processed form of crude known as condensate can be sold outside the U.S. The publication of guidelines by the Commerce Department’s Bureau of Industry and Security yesterday is the first public explanation of steps companies can take to avoid violating export laws. Speculators cut their aggregate bet that Nymex oil prices would rise in the week ended Dec. 23, the first reduction in four weeks, according to data from the U.S. Commodity Futures Trading Commission. “But the balancing will take time, perhaps not before the middle of the second quarter of 2015,” he said. “The market will get worse before it gets better.” Gasoline futures for January delivery recently fell 4.02 cents, or 2.8%, to $1.4135 a gallon. By the by, however, the relatively high prices of the past 10 years have incentivised both a giant leap in supply – in the shape of American shale and other once marginal sources – and continued paring back of existing demand, as consumers, under additional pressure from environmental objectives, seek greater efficiency.

It doesn’t end the ban on most crude exports, which Congress adopted in 1975 in response to the Arab oil embargo. “While government officials have gone out of their way to indicate there is no change in policy, in practice this long- awaited move can open up the floodgates to substantial increases in exports by end-2015,” Citigroup analysts led by Ed Morse in New York said in an e-mailed report. Personally, I wouldn’t read much into the present deep “contango” in markets – an unusual alignment whereby futures prices are a lot higher than present spot prices. Instead this has fallen on US producers.” Opec, which pumps about 40% of the world’s oil, decided to maintain its output quota at 30 million barrels a day at a 27 November meeting in Vienna, ignoring calls for supply reductions to support the market. The 12-member group produced 30.56 million a day in November, exceeding its collective target for a sixth straight month, a separate Bloomberg survey of companies, producers and analysts shows. Venezuela’s President Nicolas Maduro vowed an economic “counter-offensive” to steer the Opec nation out of recession as it struggled with the world’s fastest inflation.

Assuming Saudi Arabia sticks to its new strategy of “let the market decide”, and there is not some new seismic geopolitical disruption in supply, comparatively low prices are going to be with us for quite some while. Ecuador, which relies on crude for about a third of its revenue, may cut next year’s budget by as much as $1.5 billion and seek additional financing if prices don’t stabilize, the finance ministry has said. Oil’s collapse has also threatened to push Russia, the world’s second-largest crude exporter, into recession as its currency headed for its steepest annual slide since 1998.

However, to the extent that they are caused by the supplyside shock of falling fuel prices, they are undoubtedly good news, providing a much-needed shot in the arm. The Asian nation will account for about 11% of global demand in 2015, compared with 21% for the US, projections from the International Energy Agency in Paris show.

The eurozone high command has spent the past four years imposing policies on its constituents that plainly haven’t worked in restoring growth and stability. Worse, these policies have come widely to be seen as a form of economic coercion quite alien to the European tradition of fiercely independent sovereign states. Again, unfortunately I can see no reason why this is about to change, or why the “new deal” demanded by the likes of Matteo Renzi, the Italian prime minister, would win the wider support it deserves. Sure enough, there will eventually be a full–scale programme of quantitative easing from the European Central Bank, but in itself this is most unlikely to do the trick. Monetary policy can bring demand forward from the future, but it cannot address the underlying causes of Europe’s sickness – dysfunctional monetary union.

Britain needs a prosperous Europe to thrive itself, and to help rebalance the economy away from its unsustainable dependence on household demand and imported goods. A disorderly break–up of the euro might possibly help Britain’s longer term strategic ambitions, returning the EU to its roots as a glorified free trade zone, but in the short to medium term it would be economically disastrous.

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