On December 8-9, WTI crude oil prices continued to extend losses. The Organization of the Petroleum Exporting Countries, whose 13 member nations produce about 35 percent of the world oil supply, has effectively abandoned oil production quotas, adding to the world oil glut. “In order for us to be long-term sustainable [with the] oil price at $40, we need to do additional cuts, but if the oil price goes to $20 we need to do even more cuts”. Speculators in the US have raised bearish bets to an all-time high.
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“We’ve been going straight down like a plumb line”, said Mark Benigno, co-director of energy trading at INTL FCStone Inc. It depends on what the behavioural track record of oil is looking like. The IEA report put further pressure on crude oil prices.
“The selloff on the oil market has meanwhile taken on ludicrous dimensions, however”. “Refinery margins in the USA will shrink”.
There’s also anxiety over the potential effects of a widely expected interest rate rise from the United States’ Federal Reserve at its meeting this week, the first rise in borrowing costs in almost 10 year.
Rather than global economic depression, prices today are being slammed by a massive glut of oil.
Brent’s session low was $37.36 – barely a dollar above the $36.20 hit during the financial crisis.
A fear of USA production increases also looms – while the latest data has shown that US production is falling, shale production can respond quickly to price increases, so that any rally could be met with a production increase. Oil prices have indeed dropped by 33% year-to-date. US oil prices have traded below the global benchmark for several years because USA crude supplies are high and producers have had to discount their crude to attract buyers.
Separately, U.S. natural gas for January delivery tumbled to the lowest level since January 2002 amid forecasts that mild weather will persist through the end of the month. Diesel futures fell 1.79 cents, or 1.6%, to $1.1277 a gallon, the lowest settlement since August 2004.
The longer-term outlook is for supply to continue shrinking.
“The move appears to signal a renewed determination to maximize low-priced OPEC supply and drive out high-cost non-OPEC production – regardless of price”, the IEA said.
This seasonal weakness is compounding a structural oversupply as 0.5 million to 2 million barrels of crude per day (bpd) is produced in excess of demand.
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Karimi said that in 1979, coinciding with Iran’s Islamic Revolution, as well as during Saddam’s anti-Iran war of 1980s, fluctuations have been noticed in oil prices; “however, the prices followed a rising trend after these incidents until 1997 when they reached the range of 60 dollars a barrel”.
