Timothy Puko, 13 January 2016

US oil prices have briefly tumbled below $US30 a barrel, underscoring the global economy’s difficulty with absorbing a relentless flood of crude supplies.

The magnitude of the oil rout, now in its 19th month, has defied the forecasts of industry experts and Wall Street prognosticators, who underestimated the ability of both big state-controlled producers and smaller private-sector energy firms to weather the historic slide in prices.

The benchmark US oil contract has dropped from $US40 a barrel to $US30 in just one month, and the pace of the sell-off has rattled stock, bond and currency markets from Moscow to Riyadh to New York. Oil is down more than 70 per cent since last trading in the triple digits, back in June 2014.

Despite that fall, the steady supply in the oil markets has changed very little emboldening traders to push prices still lower. The amount of crude being stored is around record highs. Big exporters such as Saudi Arabia have kept pumping at a rapid clip even in the face of low prices. Meanwhile, US producers are finding new ways to maintain their own output even as they cut costs.

“We just really haven’t seen production (fall) in the U.S. and that’s what we need to see for oil to stop going down,” said Ben Ross, portfolio manager at Cohen & Steers Inc., which has $US52 billion in assets under management. Producers “pushed the technology and they really squeezed the most out of … these rigs.”

Oil jumped back over $US30 after dipping as low as $US29.93 a barrel during intraday trading. US oil’s losing streak hit a seventh session, the longest since its fall from above $US100 began in the summer of 2014.

Light, sweet crude for February delivery settled down 97 cents, or 3.1 per cent, at $US30.44 a barrel on the New York Mercantile Exchange, the lowest settlement since December 1, 2003. Brent, the global benchmark, fell 69 cents, or 2.2 per cent, to $US30.86 a barrel on ICE Futures Europe, at the lowest level since April 5, 2004.

That pain continued to spread to markets, companies and workers all over the world. US oil and gas companies spent another day among the stock market’s worst performers and their losses dragged down the rest of the market. Some global exporters called for emergency meetings to help support prices. Petroleo Brasileiro SA trimmed its production targets and drastically cut its investment budget after its sanguine projections for prices didn’t pan out. Oil giant BP said it would lay off about 4000 workers from its exploration and production business over the next year or so.

But while many companies have pledge similar cuts in the past year, it has yet to translate to a more balanced market. Producers have repeatedly found ways to cut costs and raise debt to keep production high. Regional prices in major producing nations including Canada and Iraq have recently fallen below $US20 a barrel. Prices are likely to keep falling until producers, especially those in North America, finally pull back.

“You have to make it obvious” to them to stop,” said Scott Shelton, broker at ICAP PLC. “They’re in denial.”

Oil had hit gains beyond 1 per cent in early-morning trading, but that didn’t last. It got a brief amount of help from the dollar paring its earlier gains and stabilising stock markets in the US, Europe and China, said Ric Navy, senior vice president for energy futures at brokerage RJ O’Brien & Associates.

Speculators were also banking on help from the Organisation of the Petroleum Exporting Countries after Nigeria’s oil minister said overnight that some nations are pushing for an emergency meeting. The organisation controls more than one-third of the world’s crude oil supply and has historically used such meetings to determine production levels as a way of regulating prices.

“Every producer is hurting now,” said Olivier Jakob of the Swiss-based Petromatrix. “It is not about the US producers anymore.”

Heavier grade oils from Canada and Iraq, which are expensive to pump, transport and refine, are the ones already below $US20 a barrel.

Canadian Heavy was selling for $US16 a barrel while Iraq’s Basra Heavy was also skirting around the $US20 a barrel level, according to Gordon Kwan, the regional head of Nomura oil and gas research.

Mr Kwan called the situation a “crisis of confidence” in the Chinese economy.

A rising dollar, which puts buyers outside the US at a disadvantage, and concerns about global growth have fuelled the latest leg down in crude. The recent dive in China’s stock market has raised questions about whether oil demand, which in past years has been driven by the developing world, could slow at a time when global supplies show little sign of easing.

“It is hard to pick a bottom (for oil prices) right now because the fundamental is so weak,” said Vyanne Lai, an analyst at National Australia Bank. “Erratic actions by the Chinese government to manipulate the yuan is sending jitters that the government is unsure what direction their forex policy should be.”

London-based Energy Aspects pointed to the mild start to the Northern hemisphere winter as another key factor in the price rout. The research group said demand had fallen by 800,000 barrels for this time of year.

Energy Aspects said supply will have to fall further to rebalance the market. But US weather updates have pulled back on the amount of cold they’re predicting in the coming weeks. Several parts of the north — especially one of the country’s biggest markets for oil-based heating fuels in New England — are likely to see above-normal temperatures settle in later this month, weather forecasters said.

Later today, the American Petroleum Institute will release its weekly US inventory forecast, in one closely watched indicator of supply.

Extracted in full from The Australian.