Oil: Falling Down

China , Energy , Europe , Oil , Russia , Saudi Arabia , USA Dec 09, 2014 No Comments

Oil falling downBrent for January settlement declined $2.88 to $66.19 a barrel on the London-based ICE Futures Europe exchange, the lowest since Sept. 29, 2009. The volume of all futures was 4.9 percent below the 100-day average. WTI for January delivery dropped $2.79 to end at $63.05 a barrel on the New York Mercantile Exchange, the lowest settlement since July 16, 2009. Volume was 13 percent above the 100-day average.

Oil was selling at $105 a barrel as recently as July, but the price has been falling ever since. Top oil exporter Saudi Arabia blocked calls from poorer members of the Organisation of the Petroleum Exporting Countries to reduce production at the group’s meeting on November 27, fueling a further slide in oil prices which have lost more than 40 per cent since June.

Global confidence was also undermined on Monday after European Central Bank governing council member Ewald Nowotny warned that the eurozone economy was experiencing a “massive weakening”, sending the euro lower against the dollar and the pound.

Oil prices also dropped slightly following the publication of China‘s monthly trade data, which came in well below expectations. In November, Chinese imports fell by 6.7 per cent and exports grew just 4.7 per cent.

We expect China‘s trade data to cause falling oil prices to fall further, as exports were lower than expected,” Daniel Ang of Phillip Futures explained. “Although lower imports would imply less crude imports, we attribute falling crude oil prices to be the primary reason for a reduced value of China’s imports.”

“Global petroleum markets are extending their price downtrend on a broadening recognition that there will be no quick rebalancing of the physical market after Friday’s Baker Hughes report showed an uptick in the U.S. drilling rig count, despite the falling price,” said Tim Evans, a Citi energy futures specialist, in a note Monday. “A downward revision to Japanese GDP and worries over slowing growth in China and the Euro Zone also weighed on market sentiment.”

According to The Economist, 4 different parameters are influencing the oil price. First, demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—have not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

In a report dated Dec. 5, Morgan Stanley said oil prices could fall as low as $43 a barrel next year. The U.S. investment bank cut its average 2015 Brent base-case outlook by $28 to $70 per barrel, and by $14 to $88 a barrel for 2016. “Without OPEC intervention, markets risk becoming unbalanced, with peak oversupply likely in the second quarter of 2015,” Morgan Stanley analyst Adam Longson said.

Saudi Arabia, which led OPEC’s decision to maintain rather than cut output, last week offered its crude to Asian customers at the deepest discount in at least 14 years. Crude is trading in a bear market as the fastest rate of U.S. output in more than three decades boosts a global glut amid signs of waning demand. “If you want to move product, you discount it,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone. “That is going to continue. Until there are cuts to production, there could be more pain to come.”

Middle East producers including Iran, Iraq and Kuwait typically follow Saudi Arabia’s lead when deciding whether to raise or lower export prices. The kingdom is the biggest member of OPEC, which supplies about 40 percent of the world’s oil.

In the meantime companies like Chevron, Exxon Mobil, and the U.K.’s BG are already hinting of scuttling major projects. In the short term, the Baker Hughes rig count seems to suggest that projects in the U.S., already in play, are going to continue but the real damage we will see from OPEC’s oil production offensive will be felt years down the road.

As a consequence of falling prices, British oil company BP announced that it would cut hundreds of back-office jobs around the world in downsizing measures. BP said that tumbling prices underlined the importance of “making the organisation more efficient”. The company has 84,000 employees worldwide, including 15,000 in the UK, and has been downsizing since the catastrophic Deepwater Horizon oil spill in the Gulf of Mexico in 2010.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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