Oil Producers Betting on Price Drop : Goldman Calls $ 40

Photographer: Gabriela Maj/Bloomberg

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.

Oil Prices

“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.

OPEC Production

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.

Idling Rigs

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.”

Other Markets

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

Jan. 12 (Bloomberg) 

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.

Oil Prices

“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.

Photographer: Eddie Seal/Bloomberg

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Forecasts Cut

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.

 

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