Oil Set for Biggest Slump Since 2008 as OPEC Battles U.S. Shale
Oil headed for the biggest annual decline since the 2008 global financial crisis as U.S. producers and the Organization of Petroleum Exporting Countries cede no ground in their battle for market share amid a supply glut.
Futures slid as much as 1.1 percent in New York, bringing losses for 2014 to 46 percent. U.S. guidelines allowing overseas sales of ultralight oil without government approval may boost the country’s export capacity and “throw a monkey wrench” intoSaudi Arabia’s plan to curb American output, according to Citigroup Inc. U.S.crude inventories are forecast to rise to the highest level for this time of the year in three decades.
Oil’s slump has roiled markets from the Russian ruble to the Nigerian naira and squeezed government budgets in producing nations including Venezuela and Ecuador. It’s also boosted China’s emergency crude reserves and helped shrink fuel subsidies in India and Indonesia. OPEC has signaled it won’t cut supply to influence prices, instead preferring to defend market share amid an unprecedented U.S. shale boom.
“For this year, the biggest factor driving down oil prices was U.S. shale production followed by a price war,” Hong Sung Ki, a commodities analyst at Samsung Futures Inc. in Seoul, said by phone today. “The possibility of U.S. curbing output will be the only booster but nothing has been done, so we’re seeing a continuation of the price decline.”
West Texas Intermediate for February delivery dropped as much as 57 cents to $53.55 a barrel in electronic trading on the New York Mercantile Exchange and was at $53.75 at 12:04 p.m. Singapore time. The contract climbed 51 cents to $54.12 yesterday, gaining for the first time in four days. Total volume was about 68 percent below the 100-day average.
Brent for February settlement fell as much as 72 cents, or 1.2 percent, to $57.18 a barrel on the London-based ICE Futures Europe exchange. Prices have decreased 48 percent this year. The European benchmark crude traded at a premium of $3.62 to WTI, compared with $12.38 at the end of last year.
President Barack Obama’s administration opened the door for expanded oil exports by clarifying that a lightly processed form of crude known as condensate can be sold outside the U.S.
The publication of guidelines by the Commerce Department’s Bureau of Industry and Security is the first public explanation of steps companies can take to avoid violating export laws. It doesn’t end the ban on most crude exports, which Congress adopted in 1975 in response to the Arab oil embargo.
“While government officials have gone out of their way to indicate there is no change in policy, in practice this long-awaited move can open up the floodgates to substantial increases in exports by end-2015,” Citigroup analysts led by Ed Morse in New York said in an e-mailed report.
The U.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. Production accelerated to 9.14 million barrels a day through Dec. 12, the fastest rate in weekly data that started in January 1983, according to the Energy Information Administration.
Crude stockpiles probably expanded by 900,000 barrels to 387.9 million in the week ended Dec. 26, based on the median estimate of nine analysts surveyed by Bloomberg News before today’s report from the Energy Department’s statistical arm.
“What we’re seeing is that supplies from North America have really outpaced worldwide demand growth and as a result, we have a supply glut,” Andy Lipow, the president of Lipow Oil Associates LLC in Houston, said by phone. “And that of course has put pressure on prices over the last several months.”
Global markets are oversupplied by 2 million barrels a day, according to Qatar’s Energy Minister Mohammed Al Sada. Saudi Arabia, which is leading OPEC to resist production cuts, has said it’s confident that prices will rebound as global economic growth boosts demand.
OPEC, which pumps about 40 percent of the world’s oil, decided to maintain its output quota at 30 million barrels a day at a Nov. 27 meeting in Vienna, ignoring calls for supply reductions to support the market. The 12-member group produced 30.56 million a day in November, exceeding its collective target for a sixth straight month, a separate Bloomberg survey of companies, producers and analysts shows.
Saudi Arabia this month offered the widest discounts in more than 10 years to sell crude to Asia, a move followed by Iraq, Kuwait and Iran. That prompted speculation that Middle East producers are protecting market share amid increased shipments from Latin America, North Africa and Russia.
Venezuela’s President Nicolas Maduro vowed an economic “counter-offensive” to steer the OPEC member out of recession as it struggled with the world’s fastest inflation. Ecuador, which relies on crude for about a third of its revenue, may cut next year’s budget by as much as $1.5 billion and seek additional financing if prices don’t stabilize, the Finance Ministry has said.
Oil’s collapse has also threatened to push Russia, the world’s second-largest crude exporter, into recession as its currency headed for its steepest annual slide since 1998. The economy, which relies on crude sales for almost half its budget, may shrink as much as 4.7 percent next year if oil averages $60 a barrel, according to the central bank. Russia must adapt to the reality of prices that could drop to as low as $40, President Vladimir Putin said on Dec. 18.
In China, a factory gauge for December fell to a seven-month low today, adding to signs of slowing growth in the world’s second-biggest oil consumer. The Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 49.6, down from 50 in November, indicating a contraction.
The Asian nation will account for about 11 percent of global demand in 2015, compared with 21 percent for the U.S., projections from the International Energy Agency in Paris show.
Commodities Head for Record Losing Run on Oil’s Rout, Dollar
The Bloomberg Commodity Index (BCOM), which tracks 22 products from crude to copper, traded at 106.0552 points at 11:45 a.m. in Singapore from 106.1031 yesterday. It’s lost 16 percent this year, with crude, gasoline and heating oil as the biggest decliners. The gauge fell to 105.7551 yesterday, the lowest level since March 2009, and a fourth year of losses would be the longest since at least 1991. A breach of 101.9986 in 2015 would bring the measure to its lowest since 2002.
Energy prices collapsed in 2014 as a jump in U.S. drilling sparked a surge in output and price war with OPEC, which chose to maintain supplies to try to retain market share. The dollar climbed to the highest level in more than five years as a U.S. recovery spurred speculation that the Federal Reserve will start to raise borrowing costs next year. Commodities are set for a volatile year in 2015, with crude oil poised to extend its slump, according to Australia and New Zealand Banking Group Ltd.
“What we’re seeing is that supplies from North America have really outpaced worldwide demand growth and as a result, we have a supply glut,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said by phone. “And that of course has put pressure on prices over the last several months. And as a result, it’s dragging down commodities indexes as well.”
Brent for February settlement traded at $57.48 a barrel on the London-based ICE Futures Europe exchange, with front-month prices 48 percent lower this year. West Texas Intermediate dropped 0.6 percent to $53.81 a barrel on the New York Mercantile Exchange. Gasoline sank 44 percent this year.
A slowdown in China also hurt demand for raw materials as policy makers grappled with a property slowdown, and data today showed a factory gauge at a seven-month low in December. The world’s biggest user of metals is headed for its slowest full-year economic expansion since 1990. China’s central bank cut interest rates last month for the first time since 2012.
Coffee was the biggest gainer this year as the worst drought in decades eroded supplies in Brazil, the largest producer and exporter. Nickel rose the most among metals, gaining 9 percent to $15,149 a metric ton on the London Metal Exchange after Indonesia halted ore exports. Both commodities rose in the early months of 2014, before dropping this quarter.
While most commodities looked oversold as the New Year neared, weak near-term fundamentals were unlikely to bring much confidence, ANZ analysts including Mark Pervan said in a report dated Dec. 22. An oversupplied market was likely to keep crude oil prices under pressure, they wrote.
Deutsche Bank AG this month cut its 2015 forecast for Brent to $72.50, down from an October prediction for an average of $88.75. Goldman Sachs Group Inc. expects Brent to average $80 to $85 a barrel in 2015, while WTI may trade at $70 to $75.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against major peers, advanced 10.6 percent in 2014 amid speculation the Fed may raise interest rates in the third quarter as the world’s biggest economy improves. The greenback strengthened against all of its 31 major peers this year.
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Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Have you avoided these sectors – you would have been better off to follow our advice in 2014 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.
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