Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.
The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.
Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth. “The Cushing number came in higher than anticipated ... it's definitely pointing to the concern that there's more supply and demand is weakening,” said Phil Flynn, analyst at Price Futures Group in Chicago, according to Reuters. “The market is still very nervous about that.”
Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.
The EIA said in its latest Drilling Productivity Report that it expects U.S. shale production to top 8.1 million barrels per day (mb/d) in January, rising by a massive 134,000 bpd month-on-month. The Permian alone will see production rise by 73,000 bpd next month. By way of context, the gains in the Permian are bigger than even some of the large monthly declines that we have seen in Venezuela, for instance.
Still, with WTI dropping below $50 per barrel, shale drillers will start to face increasing financial strain. That could force a slowdown in the shale patch. “We’re probably going to see a supply slowdown in the U.S.,” Michael Loewen, a commodities strategist at Scotiabank, told Bloomberg. “I do think that producers will react.” Related: Libya Declares Force Majeure On Largest Oil Field
But the malaise sweeping over the oil market can also be chalked up to broader fears of a global economic slowdown. U.S. equities crashed on Monday and stocks in Asia were also sharply down on Tuesday. The Dow Jones Industrial Average is down 12 percent since early October, and in fact, the S&P 500 is down nearly 5 percent on the year.
The Federal Reserve is expected to announce another rate hike this week. Rising interest rates have been blamed for increasing borrowing costs, strengthening the U.S. dollar, injecting volatility into emerging markets and setting off capital flight in some countries.
More importantly than this week’s rate hike will be direction from the Fed on what it plans to do next year. Originally, the central bank had hoped to keep rate hikes on track, but financial volatility could force it ease up. A softer tone could provide some relief for financial markets.
It’s unclear if the angry pressure from President Trump on the Fed will have any effect, but Trump’s anxiety about interest rates is not entirely misplaced. With inflation low in the U.S., and heightened volatility and weak growth seen elsewhere, many economists question the wisdom of continuing to hike interest rates. “If monetary policy doesn’t change its direction, you will have a significant meltdown on this,” Steven Ricchiuto, chief U.S. economist with Mizuho Securities, told the New York Times. “So there’s a lot riding on it.” Related: Offshore Drillers Bullish On 2019 Despite Falling Prices
But the problems could be deeper. The U.S. housing market is showing signs of strain (higher interest rates have certainly not helped). Auto sales in Asia are down. Germany saw its GDP contract in the third quarter. The U.S.-China trade war has already inflicted damage on the economy and could still grow worse. Unless there is a rebound in stocks over the next two weeks, 2018 could be the worst year for U.S. equities since 2008, which is all the more remarkable given the steep rally that unfolded over the first half of the year.
A general economic slowdown would likely cut into oil demand figures for 2019. It’s an ill-timed development for OPEC+, which just announced production cuts in order to try to balance the market. An economic downturn would make OPEC+’s job much more difficult. “The stabilisation on the oil market is already history…and the effect of the announced production cuts after OPEC’s meeting has evaporated entirely,” Commerzbank said in a note.
By Nick Cunningham of Oilprice.com
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The current true floor price for oil is $45/barrel, US producers cannot sell it for long below that price and stay in business without some major technological advance, which is the market at work.
A second market force for a commodity like oil is, with a lower price will come a greater demand.
Market forces will significantly reduce US production below $45/barrel, and expect demand to have a meaningful increase with prices at the same. Because with prices just above $46/barrel, the moment of the market has arrived for oil.
The fundamentals of the global economy are still robust and also projected to be as robust in 2019 albeit growing at 3.8% instead of 3.9% as was the case in 2018.
The OPEC+ production cuts will be implemented in January 2019 and as in the previous cuts they will take a few months before their full impact becomes evident.
Based on the above, I can single out two very important factors that have contributed recently to the oil price slump. The first is the realization by the global oil market that US sanctions have failed completely so far to cost Iran a single barrel of oil and consequently the risk of supply shortage has not materialized despite claims by the overwhelming majority of analysts and investment bankers that Iran will lose 500,000 barrels a day (b/d) to 1.5 mbd. Moreover, Iranian President Rouhani confirmed a few days ago that Iranian oil exports have actually improved despite the sanctions. The confirmation of Iran’s Central Bank that Iran’s revenues from crude oil and oil products surged by 55% between March and October this year compared to the same period of the previous year is another evidence that US sanctions are doomed to fail miserably. Furthermore, renewing the US sanction waivers in May 2019 or ending them is irrelevant to the global oil market and prices. Still there is a big possibility that waivers will be extended if only to be used as a fig leaf by the Trump administration to cover the failure of their zero option and the whole US sanctions against Iran at large.
The second factor is US manipulation of global oil prices by falsified claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar.
2019 will see more hype about US oil production and more falsification of facts claiming that US oil production will average 12.1 mbd in 2019.
The EIA has been telling us throughout 2018 that US oil production will average 11.7 mbd but now they are saying that it will average 10.9 mbd, some 800,000 barrels a day (b/d) than their original claim.
Moreover, the EIA figure of 11.7 mbd is overstated by at least 3 mbd made up of 2 mbd of NGLs which come from natural gas wells and include such things as ethane, propane, butane and pentanes and 1 mbd of ethanol. These may not qualify as crude oil. In fact, major exchanges accept neither natural gas plant liquids nor lease condensates or ethanol as satisfactory delivery for crude oil. And if major exchanges don’t accept them as crude oil, then they are not crude oil. Therefore, US oil production couldn’t have been bigger than 8.7 mbd.
The US consumed on average 20.5 mbd in 2018 according to the EIA and claimed to have produced 11.7 mbd thus needing to import 8.8 mbd. If so, where did the build-up in US crude inventory come from?
Rather than the US Congress pushing a bill, the so-called “No Oil Producing and Exporting Cartels Act,” or NOPEC, that would let the US sue OPEC for an alleged oil price fixing, it should be OPEC who should sue the United States at both the World Trade Organization (WTO) and the International Court of Justice for manipulating oil prices and thus damaging the global economy and the livelihood of oil-producing nations.
I have no doubt whatsoever that that bullish factors in the global oil market will prevail in 2019 enabling prices to resume their surge upwards.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
There is no hype about US oil production. From 2012 to 2017, US crude oil production grew from 6.5 mn barrels to 9.3 mn barrels per day. That is a tremendous growth of 7.5% while global demand grew under 2%. US oil production will continue to grow at high single digits. There is plenty of shale oil to be extracted.
OPEC can try to stimulate prices through output cuts but the effect will only be temporary . Over a long run they will continue to lose market share.