WTI at $45: have we reached the bottom yet?

Energy , Oil , Russia , Saudi Arabia , USA Jan 27, 2015 No Comments

WTI at $45: have we reached the bottom yet?West Texas Intermediate for March delivery decreased as much as $1.24 to $44.35 a barrel in electronic trading on the New York Mercantile Exchange and was down 57 cents to $45.02 at 12:14 p.m. London time. The contract lost 72 cents to $45.59 on Jan. 23, the lowest close since March 2009. The volume of all futures traded was 24 percent above the 100-day average for the time of day.

Brent for March settlement slid as much as $1.22, or 2.5 percent, to $47.57 a barrel on the London-based ICE Futures Europe exchange. It gained 27 cents to $48.79 on Jan. 23. The European benchmark crude traded at a premium of $3.14 to WTI.

It was an up-and-down session for crude, which gyrated along with the U.S. dollar in the wake of a decisive Greek election victory by the left-wing Syriza party. Prices initially rallied after OPEC Secretary-General Abdullah al-Badri said in an interview on Monday that “now the prices are around $45-$55 and I think maybe they reached the bottom and will see some rebound very soon”. But there is still plenty of negative sentiment about oil. Many U.S. traders are not convinced the worst is over and are building short positions in WTI contracts.

OPEC’s secretary-general also said oil prices as high as $200 a barrel are possible if producers fail to invest in new supply. “If you don’t invest in oil and gas, you will see more than $200,” Abdalla El-Badri said, without giving a timeframe. Brent erased a decline immediately after his comments, before resuming its slide.

Investment in oil production will fall by $100 billion, or 15%, this year compared with 2014, Fatih Birol, chief economist at the IEA, said Jan. 21 at the World Economic Forum in Davos, Switzerland. This means oil at $45 a barrel will be a temporary phenomenon, he said.

The Canadian dollar drifted closer to the 80-cent US level Monday morning as the American currency strengthened ahead of this week’s interest rate meeting by the U.S. Federal Reserve. The currency tumbled 3.5% last week to its weakest level in six years after the Bank of Canada surprised markets last week with a quarter-point cut in its key overnight rate to 0.75%.

As prices slumped, oil drillers have reduced the number of rigs operating in the U.S. to the lowest in two years, according to data from Baker Hughes Inc. Jan. 23. Companies idled 49 U.S. oil rigs last week, bringing the total to 1,317 in the seventh weekly decline, it said. “The current price cannot sustain non-OPEC supply where it was going the last year or so,” Robert Campbell, head of oil products research at London-based Energy Aspects Ltd., said by phone from New York. “This is not just U.S. shale, this is all sorts of places: North Sea, Russia.”

3 weeks ago, WBH Energy, a Texas drilling company was the first US petroleum company to file for Chapter 11 bankruptcy amid the oil price crash, indicating that the high debt companies have incurred during the shale boom may exert increasing pressure on the sector. The Wall Street Journal reported that US oil&gas companies have gone into debt over the last four years, increasing their borrowings by 55% since 2010, to nearly $200 billion.

In Mexico, more than 10,000 people working at Mexican oil service companies were laid off 2 weeks ago as state-owned Petroleos Mexicanos cut contracts in the face of the global slump in crude prices. More job losses are expected.

In the UK, BP has frozen the pay of its 84,000 staff around the world. Weeks after cutting 300 jobs in Aberdeen, the oil company’s boss, Bob Dudley, sent a memo to all its staff outlining the decision to hold salaries at last year’s levels because of the harsh trading environment. BP is among major companies responding to the price fall, which has already led to Shell, Premier Oil and Norway’s Statoil taking steps to cut costs. Projects have been put on hold and contractors’ pay cut.

The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.

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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