Oil prices keep falling — this is the reason why

20 Jan 2016 | Author: | No comments yet »

Brent crude skids to lowest since 2004 | Reuters.

LONDON Brent crude prices fell to their lowest in more than 11 years on Monday, hounded by a relentless rise in global supply that looks set to outpace demand again next year.With crude oil prices losing nearly 50 per cent from their peak levels and touching 11-year lows on Monday, Goldman Sachs and CLSA have said the prices could further fall to touch $20 a barrel.

Oil production is running close to record highs and, with fresh barrels poised to enter the market from the likes of Iran, the United States and Libya, the price of crude is set for its largest monthly percentage decline in seven years. Brent LCOG6, -1.79% futures for February delivery on London’s ICE exchange fell 53 cents, or 1.4%, to finish at $36.35 a barrel—the lowest settlement since July 5, 2004, according to Dow Jones. While consumers have enjoyed lower fuel prices, producers have hacked back spending and cut thousands of jobs, while exporting nations have suffered tumbling revenue.

Brent futures fell by about 2 percent to as low as $36.05 per barrel on Monday, their weakest since July 2004, and were down 45 cents at $36.43 at 0905 GMT. The slide comes amid fears of a slowdown in global growth, which could impact oil demand coupled with a supply glut, and the Organization of the Petroleum Exporting Countries (Opec) holding production steady.

Brent crude futures haven fallen more than 18.5 percent this month, their steepest fall since the collapse of failed U.S. bank Lehman Brothers in October 2008. “Really, I wouldn’t like to be in the shoes of an oil exporter getting into 2016. The January WTI crude contract CLF6, -0.20% which expired Monday, gained one cent to close at $34.74 a barrel. “On the supply side, U.S. shale oil continues to flood the market and traders fear the influx of Iranian oil after sanctions are lifted next year,” said Matt Weller, senior market analyst at Forex.com, in a note. “Meanwhile, the economic slowdown in China and Europe, as well as warm global temperatures as a result of climate change and a relatively warm El Niño conditions in the U.S., have reduced demand,” Weller added. Exactly how low oil prices will continue to fall isn’t clear with some industry analysts such as U.S. bank Goldman Sachs insisting $20 oil is possible in 2016. In a recent note, Christopher Wood, managing director and equity strategist at CLSA, maintained a bearish view on oil and expects it to hit the $20-a-barrel mark going ahead. “With oil having now broken through the key psychological $40 support level, which the bulls were hoping would be the bottom, it is appropriate for ‘GREED & fear’ to repeat the bearish view maintained here and lower the formal target to $20.

It remains remarkable one year after the oil collapse began how little the US production has come down as the marginal cost of shale continues to decline,” Wood says. Adding: “US crude oil production peaked at 9.61 million barrels per day in early June and has since fallen by only 4.5 per cent to 9.18 million recently.

It also remains hard to see why anyone should expect Opec pricing discipline to be restored when Saudi Arabia and Iran are engaged in a war via proxies in West Asia.” Analysts at Goldman Sachs also say that with the prices now below their three-month $38-a-barrel West Texas Intermediate, or WTI, forecast, they still see high risks that prices might decline further, as storage continues to fill. On Monday Iraq devalued its dinar currency to offset the impact of lower oil, while Azerbaijan ditched its currency peg after burning through more than half its foreign exchange reserves this year. Data showed that the number of rigs rose by 17 last week, suggesting the predicted free fall in production that was forecast for early 2016 won’t occur, with a much longer production tail-off more likely. Beyond positioning and the extrapolation of OPEC’s lack of decision on a new target ceiling and on how to accommodate higher Iranian production, fundamentals have also continued to deteriorate, they believe. “Our base case remains that the global oil stock build will on aggregate remain shy of storage capacity, although the storage buffer has once again narrowed. January natural gas NGF16, +0.63% rose 14.4 cents, or 8.2%, to $1.911 per million British thermal units, marking the biggest one-day percentage gain since January.

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