Oil Extends Biggest Yearly Slump Since 2008 Amid Glut

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.A floor hand signals to the driller to pull the pipe from the mouse hole on Orion Drilling Co.’s Perseus drilling rig near Encinal in Webb County, Texas. The price of crude oil at $55 which ultimately drives the prices at your gas station is at a record five year low (source: Nasdaq) and has fallen over 40% in six months.

Photographer: Eddie Seal/Bloomberg The Obama administration’s move to allow exports of ultralight crude without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc. Photographer: Ty Wright/Bloomberg Oil extended the largest annual decline since 2008 as the Energy Information Administration said crude stockpiles at Cushing, Oklahoma, fell last week.

A type of crude known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the oil, according to U.S. government guidelines published yesterday. 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.

That may boost supplies ready to be sold overseas to as much as 1 million barrels a day by the end of 2015, Citigroup analysts led by Ed Morse in New York said in an e-mailed report. The 2014 sell-off originated in the oil market: first from rising inventories as demand weakened and unplanned outages eased; and then when Opec — effectively Saudi Arabia — decided not to intervene and let market forces rule.

Saudi Arabia led the Organization of Petroleum Exporting Countries to maintain its production quota at a meeting last month even as a shale boom boosted U.S. output to the highest in more than three decades. One of the reasons Saudi Arabia relinquished its role as a swing producer is precisely because of these differences — in 2008, external factors caused the drop in demand, which Opec then took action to correct. That prompted speculation OPEC was willing to let prices fall to force some companies with higher drilling costs to stop pumping. “U.S. producers are under the gun to reduce capital expenditures given lower prices,” Citigroup said in the report. “Now an export route provides a new lease on life that can further weaken crude oil markets and throw a monkey wrench into recent Saudi plans to cripple U.S. production.” While the guidelines on the website of the Commerce Department’s Bureau of Industry and Security are the first public explanation of steps companies can take to avoid violating export laws, they don’t mean an end to 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 said.

Production cuts by Saudi Arabia to shore up prices would therefore only result in the kingdom losing market share given the inability and unwillingness (for various reasons such as lack of revenues or high social spending) of other Opec and non-Opec countries to reduce output. The global economy is highly dependent on oil to function and to grow and the demand equation for oil is fueled by both the developed economies (US and Europe) as well as the emerging market giant such as China. 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. The decision to not intervene is a brave one given that it signals a departure from what economic theory would suggest an oil producer should focus on — revenues.

Oil producers have been testing the prohibition on crude exports as U.S. output surged amid technological advances that have opened up shale rock formations to development in Texas, North Dakota and elsewhere. OPEC has signaled it won’t cut supply to influence prices, instead preferring to defend market share amid an unprecedented U.S. shale boom. “You have weak demand and strong supply and it brings prices back down,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It’s the year that U.S. shale oil ascended to the throne.

Saudi Arabia is giving up billions of dollars of revenues in the short term and running a $39 billion budget deficit in 2015, in an effort to retain market share. And investors, also looking at other currently positive US and world economic data such as GDP growth, corporate profitability and improvement in unemployment rates among others, should not worry that falling oil prices are a sign of a major US and global recession just now and a decline in the US stock market. The government earlier this year signaled a new way to export oil by approving permits for Pioneer Natural Resources Co. and Enterprise Products Partners LP (EPD:US) to sell processed condensate.

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. Low supplies in Cushing earlier in the year were a key factor pushing Nymex oil prices above $100 a barrel. “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.” On 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.

Indeed, Saudi Arabia’s oil minister has stated openly that irrespective of price levels “be it $40, $30 or $20 per barrel” they would not reduce output. For the industry, not only has the recent collapse broken a long period of high and stable oil prices, it has also been a huge wake up call especially in light of Saudi Arabia actively talking down the market, something which is unprecedented. 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 2.46 cents, or 1.7%, to $1.4291 a gallon.

Currently, the largest suppliers of oil in the world is OPEC (40% of world oil production) followed by Russia and the United States (source: Oil Production Wikipedia). That complacency meant US tight oil producers went on a tear, cranking up capital expenditure and racking up debt, while the oil majors focused on projects in ever more challenging locations, resulting in soaring costs. For example, a falling price in oil is a way to put economic pressure on Russia and its aggression in Ukraine, which the previous economic embargoes have done little to curb.

For the first time in a decade, the Russian autocratic government lead by Vladimir Putin is in the hot seat not only in the Western World but also at home. With some $800 billion of foreign reserves, the Saudis can afford to wait-out lower prices, and they’ll do whatever it takes to stay competitive.Poorer OPEC countries such as Venezuela, Iran and Iraq suffer the most, when oil prices fall. Historically, OPEC is very aware that US producers become less profitable as prices drop below the $60 – $70 range and many US companies are just breaking even. In the near term that may marginally work, but over the longer term it doesn’t matter much to the US because of the significant steps the US has taken in the last five years to increase efficiency and build out capacity. Companies don’t need as many rigs to drill as many holes in the ground and that in itself is a cost saving,” Fadel Gheit, senior energy analyst at Oppenheimer, said at an CNHBC interview.

Due to technology innovation and greater efficiency in oil production, stocks of US energy producers and companies should recover especially if oil prices rebound and stabilize in the $60 to $70 range which is likely in 2015. Currencies of Net Oil Exporters – sell This applies to countries like Russia and Venezuela, where a huge portion of their economies is tied to the energy sector.

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