Oil dropped to the lowest in more than four months in New York on expectation a global glut that drove prices into a bear market will be prolonged.
Goldman Sachs Group Inc. estimates the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall, forcing the market to adjust, analysts including Jeffrey Currie said in a report dated Thursday. U.S. crude supplies remain about 100 million barrels above the five-year seasonal average, Energy Information Administration data on Wednesday showed.
Oil moved into a bear market in July on signs the global surplus will persist as the U.S. pumps near the fastest rate in three decades and the largest OPEC members produced record volumes. The Bloomberg Commodity Index, which fell almost 11 percent in July, has resumed its decline.
“Prices are under pressure because we’ve got more and more crude coming out of the ground,” Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami, said by phone. “Questions about storage capacity have already been brought up.”
WTI for September delivery fell 49 cents, or 1.1 percent, to settle at $44.66 a barrel on the New York Mercantile Exchange. It’s the lowest close since March 19. Prices are down 16 percent this year.
Brent for September settlement dropped 7 cents to end the session at $49.52 a barrel on the London-based ICE Futures Europe exchange. It touched $48.88, the lowest since Jan. 30. The European benchmark crude closed at a $4.86 premium to WTI.
“It’s the familiar theme of oversupply and shaky demand,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “The negative reaction to yesterday’s inventory report set up for another drop today. We clearly have more than ample supply.”
About 170 million barrels of crude and fuel have been added to storage tanks and 50 million to floating storage globally since January, according to the Goldman report. Global oil oversupply has risen from 1.8 million barrels a day in the first half of 2015, Goldman said. The balance between supply and demand may only be restored by 2016, Goldman said.
“While we maintain our near-term WTI target of $45 a barrel, we want to emphasize that the risks remain substantially skewed to the downside, particularly as we enter the shoulder months this autumn,” the Goldman analysts said.
Crude supplies in the U.S. fell 4.4 million barrels to 455.3 million last week, the EIA said. Output expanded by 52,000 barrels a day to 9.47 million a day, the first gain in four weeks. Refinery utilization rose by 1 percentage point to 96.1 percent, the highest level since 2005.
Inventories of distillate fuel, a category that includes diesel and heating oil, rose 709,000 barrels to 144.8 million, the most since February 2012, the EIA report showed.
Ultra low sulfur diesel for September delivery rose 1.14 cents, or 0.7 percent, to settle at $1.5499 a gallon in New York. On Monday it closed at its lowest level since July 2009.
“Diesel isn’t up because of the fundamentals,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone. “It’s getting support from the upcoming refinery-maintenance season, the harvest season and anticipation of thermal needs later this year.”
The Bloomberg Commodity Index of 22 raw materials dropped 0.3 percent. Eighteen of the components, which include gold, have declined at least 20 percent from recent closing highs, meeting the common definition of a bear market.
Morgan Stanley has been pretty pessimistic about oil prices in 2015,
drawing comparisons to the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned—but definitely no worse.
This week, a revision: It could be much worse.
Until recently, confidence in a strong recovery for oil prices—and oil companies—had been pretty high, wrote analysts including Martijn Rats and Haythem Rashed, in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.
1. Demand will rise: Check
In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.
In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year’s average, according to the report.
2. Spending on new oil will fall: Check
In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.
In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined by about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone listed oil companies have cut about $129 billion in capital expenditures.
3. Stock prices remain low: Check
In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.
In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.
4. Oil supply will drop: Uh-oh
In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.
In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.
OPEC Production Surges in 2015
For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn’t have much more spare capacity to fill and because oil stocks have already been hammered.
But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—”far worse than in 1986.”
“In that case,” they wrote, “there would be little in history that could be a guide” for what’s to come.
Half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies, an executive with Weatherford International Plc said.
There could be about 20 companies left that provide hydraulic fracturing services, Rob Fulks, pressure pumping marketing director at Weatherford, said in an interview Wednesday at the IHS CERAWeek conference in Houston. Demand for fracking, a production method that along with horizontal drilling spurred a boom in U.S. oil and natural gas output, has declined as customers leave wells uncompleted because of low prices.
There were 61 fracking service providers in the U.S., the world’s largest market, at the start of last year. Consolidation among bigger players began with Halliburton Co. announcing plans to buy Baker Hughes Inc. in November for $34.6 billion and C&J Energy Services Ltd. buying the pressure-pumping business of Nabors Industries Ltd.
Weatherford, which operates the fifth-largest fracking operation in the U.S., has been forced to cut costs “dramatically” in response to customer demand, Fulks said. The company has been able to negotiate price cuts from the mines that supply sand, which is used to prop open cracks in the rocks that allow hydrocarbons to flow.
Oil companies are cutting more than $100 billion in spending globally after prices fell. Frack pricing is expected to fall as much as 35 percent this year, according to PacWest, a unit of IHS Inc.
While many large private-equity firms are looking at fracking companies to buy, the spread between buyer and seller pricing is still too wide for now, Alex Robart, a principal at PacWest, said in an interview at CERAWeek.
Fulks declined to say whether Weatherford is seeking to acquire other fracking companies or their unused equipment.
“We go by and we see yards are locked up and the doors are closed he said. “It’s not good for equipment to park anything, whether it’s an airplane, a frack pump or a car.”
(Bloomberg) — When Whiting Petroleum Corp. put itself up for sale this month, the oil industry appeared on the brink of a deal surge that would dramatically redraw the energy landscape.
Instead, Whiting decided it was better off selling shares and borrowing more money to surmount a cash shortfall brought on by tumbling crude prices. The lesson? Takeover fever driven by the oil-market crash is yet to really heat up because share prices haven’t fallen as fast or hard as crude. It may be later this year or early 2016 before buyout candidates resign themselves to a long-term market slump and lower valuations, said David Zusman, chief investment officer at Talara Capital Management LLC. “Nobody wants to catch a falling knife,” said Chris Pultz, portfolio manager of a merger-arbitrage fund at Kellner Capital in New York. “The last thing anyone wants to do is price a deal now, only to have oil fall to $30 a barrel later on. There’s a lot of skittishness.”
Whiting, a potentially juicy prize as the biggest oil producer in North Dakota’s Bakken shale, isn’t the only one fending off bargain seekers. Tullow Oil Plc, an Africa-focused group seen as a perennial takeover target, earlier this month tapped lenders to restore its finances. In North America, Encana Corp., Noble Energy Inc., RSP Permian Inc. and Carrizo Oil & Gas Inc. have sold new shares, effectively blocking deals. Lesser Evils
For oil producers squeezed by heavy debt and a collapse in crude prices below $50, issuing new shares and rolling over old loans, when given the choice, remain lesser evils than a corporate fire sale. So far this year, the oil and natural gas sector has seen deals worth nearly $1.9 billion, the lowest quarterly figure in at least five years, according to Bloomberg data. In the first quarter of 2014, energy deal making reached $27.9 billion.
“Every time there’s a market downturn, you always have this chorus of suggested interest in takeovers,” said Vincent Piazza, global energy research coordinator at Bloomberg Intelligence in New York. “In reality, few deals of any consequence occur.”
A disconnect between company valuations and the crude market is adding to buyers’ uncertainty. Since Dec. 15, stock values in an index of 20 U.S. producers have bounced back an average 7 percent, even as oil fell another 15 percent to $47.51 a barrel on Tuesday. Second Half
The price crash was so swift that many companies may be waiting for the market to stabilize before agreeing to major acquisitions, said Osmar Abib, who leads the global energy practice for Credit Suisse Group AG.
“You’re going to see a much bigger flow of announcements in the second half of the year because by then, people will have adjusted to the new environment,” Abib said Tuesday in an interview.
Buyers and sellers need time to find common ground on valuations, Scott Sheffield, chief executive officer at Pioneer Natural Resources Co., said Tuesday in an interview at the Howard Weil Energy Conference in New Orleans.
“It’s going to take at least mid-summer or late in the year for oil prices to bottom and to start going up again and for people to develop their own views,” Sheffield said.
Much will depend on where oil prices settle. Sheffield said he sees a rebound to $60 a barrel by the end of the year, with prices ranging from $60 to $80 over the next five years. A $60 price over the long term will lead to more consolidation, he said.
Another possible deal-driver: the availability of capital from loans and equity offerings may dry up, particularly if the U.S. Federal Reserve increases interest rates.
Dealmaking hasn’t completely ground to a halt. Whiting, based in Denver, paid $1.8 billion in stock and assumed $2.2 billion in debt in December to close on the purchase of Bakken rival Kodiak Oil & Gas Corp., a deal announced in July, when crude was still above $100 a barrel.
That same month, Spain’s Repsol SA agreed to pay $8.3 billion in cash and assume $4.66 billion in debt for Canada’s Talisman Energy Inc. The transaction has yet to close.
Companies that own drilling rigs and provide equipment and field services to the producers are most prone to consolidation during bear markets, Piazza said. During the last crude slump in 2009-10, 247 oilfield-services deals with a combined value of $32 billion dwarfed the 51 transactions among oil producers, which amounted to just $6.6 billion, he said. Blackstone, Carlyle Money is certainly waiting in the wings for a flurry of acquisitions. The world’s four largest buyout firms, including Blackstone Group LP and Carlyle Group LP, have amassed a $30 billion war chest for deals.
“This is one of the best periods, if not the best, to invest in global energy,” said Marcel van Poecke, head of Carlyle International Energy Partners.
Piazza of Bloomberg Intelligence said the biggest oil companies are more likely to snatch up individual assets and business units of smaller rivals, rather than acquire entire corporations. Exxon Mobil Corp. is among buyers indicating they’re particularly interested in acquiring drilling assets that expand on their existing oilfields.
For those companies with an appetite for wholesale corporate takeovers, the best approach may be to bide their time, said Jack A. Bass tax strategist .
“You’re not going to lose anything by waiting,” Jack A. Bass advises clients. “You’ll probably get it cheaper a few months from now.”
Oil extended losses to trade below $45 a barrel amid speculation that U.S. crude stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5 1/2 years.
Futures fell as much as 2.6 percent in New York, declining for a third day. Crude inventories probably gained by 1.75 million barrels last week, a Bloomberg News survey shows before government data tomorrow. The United Arab Emirates, a member of the Organization of Petroleum Exporting Countries, will stand by its plan to expand output capacity even with “unstable oil prices,” according to Energy Minister Suhail Al Mazrouei.
Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Goldman Sachs Group Inc. said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale SA also reduced its price forecasts.
“There’s adequate supply,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone today. “It’s really going to take someone from the supply side to step up and cut, and the only organization capable of doing something substantial is OPEC. I can’t see the U.S. reducing output.”
West Texas Intermediate for February delivery decreased as much as $1.19 to $44.88 a barrel in electronic trading on the New York Mercantile Exchange and was at $44.94 at 2:26 p.m. Singapore time. The contract lost $2.29 to $46.07 yesterday, the lowest close since April 2009. The volume of all futures traded was about 51 percent above the 100-day average.
Brent for February settlement slid as much as $1.31, or 2.8 percent, to $46.12 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $1.24 to WTI. The spread was $1.36 yesterday, the narrowest based on closing prices since July 2013.
U.S. crude stockpiles probably rose to 384.1 million barrels in the week ended Jan. 9, according to the median estimate in the Bloomberg survey of six analysts before the Energy Information Administration’s report. Supplies have climbed to almost 8 percent above the five-year average level for this time of year, data from the Energy Department’s statistical arm show.
Production accelerated to 9.14 million barrels a day through Dec. 12, the most in weekly EIA records that started in January 1983. The nation’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.
The U.A.E. will continue plans to boost its production capacity to 3.5 million barrels a day in 2017, Al Mazrouei said in a presentation in Abu Dhabi yesterday. The country currently has a capacity of 3 million and pumped 2.7 million a day last month, according to data compiled by Bloomberg.
OPEC, whose 12 members supply about 40 percent of the world’s oil, agreed to maintain their collective output target at 30 million barrels a day at a Nov. 27 meeting in Vienna. Qatar estimates the global surplus at 2 million a day.
In China, the world’s biggest oil consumer after the U.S., crude imports surged to a new high in December, capping a record for last year. Overseas purchases rose 19.5 percent from the previous month to 30.4 million metric tons, according to preliminary data from the General Administration of Customs in Beijing today. For 2014, imports climbed 9.5 percent to 310 million tons, or about 6.2 million barrels a day.
Oil Companies and Investors In Denial : Portfolio Profits At Risk
My rant – the curse of Cassandra :
Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :
when she prophesied true things, she was not believed.
Shipping Sector / Bulk ShippersYou can review our stock market letter athttp://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates- illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ Energy I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…
Have you avoided these sectors ?– you ( your portfolio) would have been better off today
and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.
Jack A. Bass Managed Accounts
Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.
You can withdraw your funds at the rate of 1 % monthly if you require an income stream
To learn more about portfolio management , tax reduction,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)
Telephone Jack direct at 604-858-3202
10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).
Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.
The oil industry was listening as OPEC talked down crude prices to a more than five-year low.
Drillers, refiners and other merchantsincreased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since 1991, with some paying to break leases on drilling equipment.
Companies are hedging more and drilling less amid concern that the biggest slump in prices since 2008 will continue. Oil dropped for a seventh week after officials from Saudi Arabia, the United Arab Emirates andKuwait reiterated they won’t curb output to halt the decline.
“Producers are desperately hedging their production in a drastically falling market,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone Jan. 9. “They’re trying to lock in prices because they are convinced that the market will stay down for a while.”
WTI slid $6.19, or 11 percent, to $47.93 a barrel on the New York Mercantile Exchange on Jan. 6, settling below $50 for the first time since April 2009. Futures for February delivery declined $1.53 to $46.83 in electronic trading at 8:09 a.m. local time.
The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, has stressed a dozen times in the past six weeks that it won’t curb output to halt the rout. The U.A.E. won’t cut production no matter how low prices fall, Yousef Al Otaiba, its ambassador to the U.S., said at a Bloomberg Government lunch in Washington on Jan. 8.
The group decided to maintain its collective quota at 30 million barrels a day at a Nov. 27 meeting in Vienna. Output averaged 30.24 million barrels a day in December, according to a Bloomberg survey.
U.S. crude production was 9.13 million barrels a day in the seven days ended Jan. 2 after reaching 9.14 million three weeks earlier, the highest in weekly Energy Information Administration data since 1983. Stockpiles were 382.4 million barrels as of Jan. 2, a seasonal high.
The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which have unlocked supplies from shale formations including the Eagle Ford and Permian in Texasand the Bakken in North Dakota. Global oil prices below $40 begin to make wells in such places unprofitable to operate, Wood Mackenzie, an Edinburgh-based consultant, said in a report Jan. 9.
Rigs seeking oil decreased by 61 to 1,421, Baker Hughes Inc. said Jan. 9, extending the five-week decline to 154. It was the largest drop since February 1991, which also followed a slide in prices before the start of the Persian Gulf War.
Helmerich & Payne Inc., the biggest rig operator in the U.S., and Pioneer Energy Services Corp. said last week that they had received early termination notices for rig contracts.
Producers and merchants boosted their net short position by 21 percent, or 17,577 futures and options, to 100,997 in the week ended Jan. 6, according to the Commodity Futures Trading Commission, the most since Jan. 10, 2012.
Hedge funds and other large speculators raised bullish bets by 7 to 199,395 contracts.
“You have this tension and lack of consensus among money managers of what to do with a price under $50,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone Jan. 9. “People tend to think of money managers as a black box where they all use same strategy and march in lockstep, but this highlights that it’s not really the case.”
Bullish bets on Brent crude rose to the highest level in more than five months, according to ICE Futures Europe exchange.
Net-long positions gained by 24,598 contracts, or 21 percent, to 140,169 lots in the week to Jan. 6, the data show. That’s the highest since July 15.
In other markets, bearish wagers on U.S. ultra-low sulfur diesel decreased 12 percent to 23,789 contracts as the fuel sank 7.6 percent to $1.7262 a gallon.
Net short wagers on U.S. natural gas fell 15 percent to 10,323 contracts. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Nymex natural gas dropped 5 percent to $2.938 per million British thermal units.
Bullish bets on gasoline declined 0.4 percent to 44,050. Futures slumped 6.8 percent to $1.3543 a gallon on Nymex in the reporting period.
Regular gasoline slid 1.3 cents to an average of $2.139 on Jan. 10, the lowest since May 5, 2009, according to Heathrow, Florida-based AAA, the country’s largest motoring group.
The global crude oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates. Only 1.6 percent of supply would be unprofitable with prices at $40 a barrel, according to Wood Mackenzie.
“If you’re a producer and your cost is below the price in the market, if you hedge it even at depressed prices you can still make money,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone Jan. 9. “Somebody’s locking in profits even at these low prices.”
Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned
Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market.
The bank reduced its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year, according to an e-mailed report. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York.
The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom that’s unlocked supplies from formations including the Eagle Ford in Texas and the Bakken in North Dakota. Prices slumped almost 50 percent last year as the Organization of Petroleum Exporting Countries resisted output cuts even amid a global surplus that Qatar estimates at 2 million barrels a day.
“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.”
West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.
Goldman reduced its six and 12-month WTI predictions to $39 a barrel and $65, from $75 and $80, respectively, while its estimate for Brent for the period were cut to $43 and $70, from $85 and $90, according to the report.
“We forecast that the one-year-ahead WTI swap needs to remain below this $65 a barrel marginal cost, near $55 a barrel for the next year to sideline capital and keep investment low enough to create a physical re-balancing of the market,” the bank said.
Goldman estimates there’s sufficient capacity to store a surplus of 1 million barrels a day of crude for almost a year. It expects the spread between WTI and Brent to widen in the next quarter as discounted U.S. crude prices and “strong margins lead U.S. refineries to export the glut to the other side of the Atlantic.”
The Brent-WTI spread will average $5 a barrel in 2016, according to the bank. The gap was at $1.50 today.
Investors are in denial but bankers see the problem:
Lenders are already doling out tough love to companies, with some lenders wanting to see producer plans for handling further price drops while others are urging asset sales.
The 10 highest ratios of net debt/EBITDA from the last 12 months, according to S&P Capital IQ, belong to KWK, AR, WRES, GDP, REN, HK,XCO, REXX, MPO, EPE.
WTI Oil Pares Gain After Report Shows Fuel Supply Gains
West Texas Intermediate oil pared gains after a government report showed that U.S. fuel stockpiles surged. Brent earlier slipped below $50 a barrel for the first time since May 2009.
Inventories of distillate fuel, a category that includes heating oil and diesel, increased by a record 11.2 million barrels last week, the Energy Information Administration said. Gasoline stockpiles advanced 8.12 million barrels while crude supplies decreased 3.06 million.
“This report is bearish overall because of the huge builds in distillate and gasoline supplies,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “You can ignore the crude number because there’s already so much in storage. This decline was just a drop in the bucket.”
The plummeting price of oil means no more trout ice cream.
Coromoto, a parlor in Merida, Venezuela, famous for its 900 flavors,closed during its busiest season in November because of a milk shortage caused by the country’s 64 percent inflation rate, the world’s fastest.
That’s the plight of an oil-producing nation. At the same time, consuming countries like the U.S. are taking advantage. Trucks, which burn more gasoline, outsold cars in December by the most since 2005, according to data from Ward’s Automotive Group.
The biggest collapse in energy prices since the 2008 global recession is shifting wealth and power from autocratic petro-states to industrialized consumers, which could make the world safer, according to a Berenberg Bank AG report. Surging U.S. shale supply, weakening Asian and European demand and a stronger dollar are pushing oil past threshold after threshold to a five-and-half-year low, with a dip below $40 a barrel “not out of the question,” said Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees about $120 billion.
“Oil prices are the big story for 2015,” said Kenneth Rogoff, a Harvard University economics professor. “They are a once-in-a-generation shock and will have huge reverberations.”
Brent crude, the international benchmark, fell as low as $49.66 a barrel today, dropping below $50 for first time since 2009. Prices dropped 48 percent in 2014 after three years of the highest average prices in history. West Texas Intermediate, the U.S. benchmark, plunged to as low as $46.83 today, about a 56 percent decline from its June high.
“We see prices remaining weak for the whole of the first half” of 2015, said Gareth Lewis-Davies, an analyst at BNP Paribas in London.
If the price falls past $39 a barrel, we could see it go as low as $30 a barrel, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey, who projected the 2014 drop.
“Where prices bottom will be based on an emotional decision,” Zimmerman said. “It won’t be based on the supply-demand fundamentals, so it’s guaranteed to be overdone to the downside.”
The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6 percent on average over the next two years if oil fell to $40, while Russia would contract 2.5 percent over the same period, according to an Oxford Economics Ltd.’s December analysis of 45 national economies.
Among advanced economies, Hong Kong is the biggest winner, while Saudi Arabia, Russia and the United Arab Emirates fare the worst, according to Oxford Economics.
One concern of central bankers is the effect of falling oil prices on inflation. If crude remains below $60 per barrel this quarter, global inflation will reach levels not seen since the worldwide recession ended in 2009, according to JP Morgan Securities LLC economists led by Bruce Kasman in New York.
Kasman and his team are already predicting global inflation to reach 1.5 percent in the first half of this year, while sustained weakness in oil suggest a decline to 1 percent, they said.
The euro area would probably witness negative inflation, while rates in the U.S., U.K. and Japan also would weaken to about 0.5 percent. For what it calls price stability, the Federal Reserve’s inflationtarget is 2 percent. Emerging-market inflation would also fade although lower currencies and policies aimed at slowing the effects on retail prices may limit the fall.
As for growth, a long-lasting price of $60 would add 0.5 percentage point to global gross domestic product, they estimate.
Even as cheaper fuel stimulates the global economy, it could aggravate political tension by squeezing government revenue and social benefits, Citigroup Inc. analysts said in a Jan. 5 report.
Either way, previously unthinkable events now look more likely. Byron Wien, a Blackstone Group LP vice chairman, predicting that Russian President Vladimir Putin will resign in 2015 and Iran will agree to stop its nuclear program.
Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions and years of economic mismanagement under former President Mahmoud Ahmadinejad.
President Hassan Rouhani, elected on a pledge of prosperity to be achieved by ending Iran’s global isolation, is facing a falling stock market and weakening currency. Iranian officials are warning of spending and investment cuts in next year’s budget, which will be based on $72-a-barrel crude. Even that forecast is proving too optimistic.
“Iran will stumble along with less growth and development,” said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech in Blacksburg, Virginia, who specializes in Iran’s economy. “The oil price fall is not reason enough for Iran to compromise.”
The Russian economy may shrink 4.7 percent this year if oil averages $60 a barrel under a “stress scenario,” the central bank said in December. The plunge in crude prices prompted a selloff in the ruble with the Russian currency falling to a record low against the dollar last month and tumbling 46 percent last year, its worst performance since 1998, when Russia defaulted on local debt.
“The risk is that, as a badly-wounded and cornered bear, Russia may turn more aggressive in its increasing desperation, threatening global peace and the European economic outlook,” said Holger Schmieding, Berenberg Bank’s London-based chief economist. However, “the massive blow to Russia’s economic capabilities should –- over time –- make it less likely that Russia will wage another war.”
Russian oil production rose to a post-Soviet record last month, showing how pumping of the nation’s biggest source of revenue has so far been unaffected by U.S. and European sanctions or a price collapse. The nation increased output to 10.667 million barrels a day, according to preliminary data from the Energy Ministry on Jan. 2. That compares with global consumption of 93.3 million barrels a day, based on the International Energy Agency’s estimate for 2015.
Venezuela, which relies on oil for 95 percent of its export revenue, risks insolvency, Jefferies LLC said in a Jan. 6 note. The cost of insuring the country’s five-year debt has tripled since July, Citigroup said. President Nicolas Maduro is visiting China to discuss financing and expects to travel to other OPEC nations to work out a pricing strategy.
The U.S., still a net oil importer, would accelerate economic growth to 3.8 percent in the next two years with oil at $40 a barrel, compared with 3 percent at $84, the Oxford Economics study found. The boost to consumers could be offset by oil companies’ scaling back investments, according to Kate Moore, chief investment strategist at JPMorgan Private Bank. Producers are cutting spending by 20 percent to 40 percent, according to Fadel Gheit, an analyst at Oppenheimer & Co.
The mixed picture is confounding investors. The Standard & Poor’s 500 Index of U.S. equities fell 1.9 percent on Jan. 5, the biggest decline since October, as oil brought down energy shares and stoked concerns that global growth is slowing.
While cheaper oil helps consumers, business spending has a bigger effect on equities, and oil companies are set to cut investments. Oil at $50 a barrel could trim $6 a share off earnings in theS&P 500 Index this year, according to Savita Subramanian and Dan Suzuki, New York-based strategists at Bank of America Corp.
Bets on high energy prices have mashed share prices of companies such as Ford Motor Co., Tesla Motors Inc. and Boeing Co.
Caterpillar Inc., Joy Global Inc., Allegheny Technologies Inc., Dover Corp., Jacobs Engineering Group and Quanta Services Inc. are all down more than 20 percent since oil peaked at almost $108.
Despite those losses, Morgan Stanley last month concluded cheaper fuel is a net benefit for the U.S. economy.
“Any massive redistribution of income can raise political tensions,” Schmieding of Berenberg Bank said in the Jan. 6 report. “But, net/net, strengthening the U.S., Europe, Japan, China and India, while weakening Russia, Iran, Saudi Arabia and Venezuela, is likely to make the world a safer place in the end.”