Have Oil Prices Hit Bottom?

31 Dec 2014 | Author: | No comments yet »

Have Oil Prices Hit Bottom?.

Oil dropped below $56 a barrel on Wednesday and was heading for its biggest annual decline since 2008, pressured by weakening demand and a supply glut prompted by the US shale boom and OPEC’s refusal to cut output. 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.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 is headed for its worst annual price drop since 2008 as OPEC refuses to cut production despite the abundant supply in the market caused by slowing demand from China and the booming U.S. shale production. The price of global benchmark Brent crude has nearly halved in 2014 as demand growth slowed, the United States expanded output and OPEC, dropping its strategy of trimming supply to keep oil around $100 a barrel, chose instead to defend market share.

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. On Wednesday, prices came under further pressure from a survey showing China’s factory sector shrank for the first time in seven months in December — a bearish indication on the strength of oil demand in the world’s second-largest consumer.

Earlier Wednesday, China’s factory data showed more sluggishness, with the final reading of the HSBC Manufacturing Purchasing Managers’ Index at 49.6 in December, down from 50 in November. The publication of guidelines by the Commerce Department’s Bureau of Industry and Security is the first public explanation of steps companies can take to avoid violating export laws. Late Tuesday, the American Petroleum Institute said weekly total U.S. crude stockpiles rose by 760,000 barrels, and stockpiles at the Cushing, Oklahoma delivery point for Nymex WTI futures rose by 1.8 million barrels. “Given that crude stocks normally decline at this time of year, we’ll view the increase as moderately bearish if confirmed by the more definitive Department of Energy data due out at 10:30 a.m.

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.” 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.

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. Both contracts are on track to settle at five-year lows, marking a “poetic end to…what ended up being a difficult year for the oil and gas industry,” said Adam Wise, managing director at John Hancock Financial Services, who helps oversee about $7 billion in energy-related investments.

Production accelerated to 9.14 million barrels a day through Dec. 12, the fastest rate in weekly data that started in January 1983, according to the Energy Information Administration. Commerce Department Tuesday confirmed that it has granted more permissions to energy companies with ultralight oil export applications pending before the agency. In addition, transportation companies will benefit as it reduces their cost of doing business, potentially resulting in lower prices on a large number of items.

Saudi Arabia, which is leading OPEC to resist production cuts, has said it’s confident that prices will rebound as global economic growth boosts demand. 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. New pipelines have opened in recent months to bring oil from the Rocky Mountain region, North Dakota and Canada to storage facilities in Cushing, said Andy Lipow, president of Lipow Oil Associates in Houston. “We’ve steadily rebuilt those inventories” at Cushing, said Donald Morton, senior vice president at Herbert J. Sims & Co. “It’s just very bearish out there right now…I don’t see anybody wanting to pick a bottom just yet.” The storage data also showed that supplies of petroleum products rose more than expected.

He has since appointed Prince Muqrin bin Abdulaziz as second in line to the throne after Crown Prince Salman 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. 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. A sub-50 figure indicates contraction. “It’s difficult to see what will turn the market,” said David Wech at JBC Energy. “Most news coming in is relatively bearish and an upside to prices looks unlikely anytime soon.” 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 2.72 cents, or 19%, to $1.4265 a gallon. The Asian nation will account for about 11 percent of global demand in 2015, compared with 21 percent for the U.S., projections from the International Energy Agency in Paris show. This current decline may cause some drillers to exit the market, especially if prices remain low for an extended period and their financial reserves expire.

However, with fewer companies in this space, there will be less supply and if the global economy does indeed rebound, this combination could cause prices to trend higher. Crude oil is a vitally important commodity which is used for gasoline, heating oil, diesel fuel, jet fuel, propane, petrochemical feedstock, asphalt, lubricants, waxes, and a host of other items.

Therefore, even though this decline may cost some jobs and harm a few companies, the benefits far outweigh the damage, that is, unless you happen to be someone who was laid off.

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