Oil’s drop has been so rapid and so driven by sentiment that forecasters from Bank of America Corp. to UBS AG say there are no clear signs for when the rout will end.
Brent crude slumped below $50 a barrel yesterday, 57 percent less than the peak of $115.71 reached in June. UBS analysts say investors should avoid oil until the “free fall” ends. Traders are ignoring supply disruptions that would normally boost prices, ABN Amro Bank NV analysts said.
Oil’s slump accelerated after Saudi Arabia and other members of the Organization of Petroleum Exporting Countries decided Nov. 27 to maintain their production ceiling. The 12-member group is seeking to protect market share rather than prices, challenging U.S. shale drillers and other rivals to pare their output instead.
“It’s not clear that anyone can answer how low it will go,” Ed Morse, global head of commodities research for Citigroup Inc. in New York, said by phone yesterday. “It’s always hard to call a bottom. The Saudis took the shale revolution seriously and are acting accordingly. They’re testing how much production growth can be curtailed by the drop in prices.”
Crude slumped by 48 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest pace in more than three decades. U.S. output gained to 9.132 million barrels a day last week, Energy Information Administration data released yesterday showed. That’s close to the 9.137 million-barrel figure in the period to Dec. 12, the highest in weekly data that started in January 1983.
Glut Obsession
“The bottom for the OIL PRICE is a mirage,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said by e-mail yesterday. “It’s more important, just as it was during the crash to $30 a barrel five years ago, to recognize that the slump is irrational exuberance and prices will recover.”
The market is “obsessed” with the perception of a supply glut and traders are ignoring disruptions such as those caused by fighting in Libya, Hans van Cleef, an energy economist at ABN Amro in Amsterdam, said by phone Jan. 6. A crude tanker was bombed there on Jan. 4 while storage tanks at its biggest oil port were blown up last month. Libya has Africa’s largest oil reserves.
“Prices remain in a free fall,” Giovanni Staunovo, an analyst at UBS in Zurich, wrote in a report yesterday. “We think it is too early to call for a solid short-term price floor.”
There is no evidence yet that non-OPEC supply is contracting or that lower prices are spurring demand, both of which could halt the collapse, Miswin Mahesh, an analyst at Barclays Plc in London, said by phone Jan 6.
Collision Course
“The fundamental snapshot at the moment does not provide for reasons that prices should have a turnaround,” said Mahesh. “It’s increasingly looking like we’ll need to see some forceful exits in terms of supply – it’s almost like collision course. It’s just a matter of time for that point when a collision course gets noticed.”
There is a “growing risk” that Brent will fall to $40 and West Texas Intermediate, the U.S. benchmark, below $35,Francisco Blanch, head of commodities research at Bank of America in New York, wrote in a report yesterday.
Last year’s loss was the second biggest on record behind a 51 percent tumble in the 2008 financial crisis. Brent reached an all-time high of $147.50 a barrel on July 11, 2008.
“The market is facing many more challenges than in 2008 and 2009 when we were last at these levels,” said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey, who projected the 2014 drop in prices. “There was no million barrels a day of surplus output.”
Market Moves
Brent rose 30 cents to $51.45 a barrel on the London-based ICE Futures Europe exchange at 11:48 a.m. Singapore time. Yesterday it touched $49.66, the least since April, 2009.
West Texas Intermediate crude added 46 cents to $49.11 a barrel in electronic trading on the New York Mercantile Exchange.
“The price drop has been too fast and too far for the fundamentals,” said ABN Amro’s van Cleef. “The market is only focusing on the negative. It’s very hard to see a trigger which could turn the sentiment.”
Source: Bloomberg