Oil price crashes towards $50 a barrel on fresh turmoil on the financial markets
By HUGO DUNCAN FOR THE DAILY MAIL
PUBLISHED: 00:24, 7 January 2015 | UPDATED: 00:24, 7 January 2015
The oil price crashed towards $50 a barrel last night on another day of turmoil on the financial markets.
Brent crude, the global benchmark for oil prices, fell as much as 5 per cent to a new five-and-a-half year low of $50.54 – taking its losses since June to around 56 per cent.
The slump in the oil price – on the back of weak demand and plentiful supply – has wreaked havoc on global stock markets.
+1
Tumbling: The slump in the oil price has wreaked havoc on global stock market
The FTSE 100 index fell 50.65 points to 6366.51 in London yesterday while major stock markets in Europe were also on the slide. ‘Oil continues to dominate the markets,’ said Alastair McCaig, a market analyst at trading firm IG.
The lower oil price has seen the price of petrol at the pumps tumble in recent months in a boost to motorists and fuel-dependent industries.
It is hoped that the low price of crude will help stimulate the global economy in the coming months – and provide a much-needed lift to the UK.
‘The halving of oil prices over the past six months should provide some timely support to the economic recovery,’ said Jonathan Loynes, chief European economist at Capital Economics.
Demand for oil remains subdued as the spectre of recession and deflation hangs over the eurozone, the Chinese economy slows, and Japan remains in the doldrums.
Oil production in the US has soared on the back of a fracking boom while Russian output hit a post-Soviet era high in 2014 and exports from Iraq reached their highest since 1980.
By HUGO DUNCAN FOR THE DAILY MAIL
PUBLISHED: 00:24, 7 January 2015 | UPDATED: 00:24, 7 January 2015
The oil price crashed towards $50 a barrel last night on another day of turmoil on the financial markets.
Brent crude, the global benchmark for oil prices, fell as much as 5 per cent to a new five-and-a-half year low of $50.54 – taking its losses since June to around 56 per cent.
The slump in the oil price – on the back of weak demand and plentiful supply – has wreaked havoc on global stock markets.
+1
Tumbling: The slump in the oil price has wreaked havoc on global stock market
The FTSE 100 index fell 50.65 points to 6366.51 in London yesterday while major stock markets in Europe were also on the slide. ‘Oil continues to dominate the markets,’ said Alastair McCaig, a market analyst at trading firm IG.
The lower oil price has seen the price of petrol at the pumps tumble in recent months in a boost to motorists and fuel-dependent industries.
It is hoped that the low price of crude will help stimulate the global economy in the coming months – and provide a much-needed lift to the UK.
‘The halving of oil prices over the past six months should provide some timely support to the economic recovery,’ said Jonathan Loynes, chief European economist at Capital Economics.
Demand for oil remains subdued as the spectre of recession and deflation hangs over the eurozone, the Chinese economy slows, and Japan remains in the doldrums.
Oil production in the US has soared on the back of a fracking boom while Russian output hit a post-Soviet era high in 2014 and exports from Iraq reached their highest since 1980.
Osborne: 'Let families benefit' from low oil prices
The price of oil has fallen to a new five-and-a-half year low, with Brent Crude now below $52 a barrel
Chancellor George Osborne has warned that it is "vital" for the fall in oil prices to be passed to consumers.
Mr Osborne tweeted that they should feel the benefit not only in pump prices but utility bills, heating oil and airline tickets.
He raised the issue at Cabinet, saying the government should watch the industry "like hawks" to ensure savings were passed on.
The Treasury said it was examining whether any action was needed.
A spokesman said officials were conducting studies into whether industries are passing on the fall in oil prices to consumers.
The price of Brent crude oil has fallen to $51.12 per barrel, its lowest level since March 2009 - six months ago it cost $115.
Supermarket cuts
All four big UK supermarkets have announced further fuel price cuts, bringing petrol ever closer to £1 a litre.
Tesco, Morrisons, Sainsbury's and Asda have reduced prices by 2p a litre on both petrol and diesel.
Mr Osborne's tweet noted that the price of oil was at its lowest in five years and added: "Vital this is passed on to families at petrol pumps, through utility bills and air fares."
Energy UK chief executive Lawrence Slade insisted cuts in the wholesale price of gas were being passed on to consumers.
"When people shop around they can easily find deals that are over £100 cheaper than this time last year and in line with cuts in wholesale energy prices," he said.
BBC political correspondent Ross Hawkins said politicians were keen to be seen fighting for lower prices.
Last year, Liberal Democrat Chief Secretary to the Treasury Danny Alexander wrote to all the main fuel suppliers and distributors, calling on them to pass on the benefit of falling prices as soon as possible.
Mr Alexander told ITV News that falling oil prices are a "benefit to most of the UK economy" provided that the savings are passed on "at the pumps, in the cost of holidays and in the cost of heating homes".
He also said more support was needed for the North Sea oil and gas sector which, as the biggest industrial investor in the UK, is "adversely affected" by falling prices. "So, that is why we are also putting in place a more beneficial tax environment," he added.
Labour shadow energy secretary Caroline Flint said the Conservatives had done "absolutely nothing" to address firms' failures to pass on reductions in wholesale costs.
"We need action, not another inquiry," Ms Flint said, and repeated calls for the regulator to have the power to force energy companies to pass on savings.
Chancellor George Osborne has warned that it is "vital" for the fall in oil prices to be passed to consumers.
Mr Osborne tweeted that they should feel the benefit not only in pump prices but utility bills, heating oil and airline tickets.
He raised the issue at Cabinet, saying the government should watch the industry "like hawks" to ensure savings were passed on.
here here!!!
If oil prices keep falling, at some point it's not profitable to pull it out of the ground. But we're not there yet, according to an analysis of production costs by an energy consulting firm.
In fact, even if the Brent price index falls another 20 percent from Friday's closing price—to $40 a barrel—just 1.6 percent of the world's oil supply would represent unprofitable production.
Energy consultant Wood Mackenzie analyzed production data from 2,222 oil fields around the world to see just how much further oil prices would have to fall to make them "cash negative"—costing more to operate than the oil is worth. That price can act like a brake on production, according to Wood Mackenzie analyst Robert Plummer.
Read MoreSpillover effect of cheap oil: Bankruptcy shock
"Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply," he said.
A derrick hand removes the the plastic caps off the threaded ends of pipe used in the drilling process in Knox County, Ohio.
Among the first to shut off the spigots would be U.S onshore production from the trickle of crude emanating from aging, so-called stripper wells. Wood Mackenzie estimates there's about a million barrels per day coming from a collection of older wells that produce only a few barrels a day. The cost of keeping them going varies between $20 and $50 a barrel. So if the price of crude drops below $40 a barrel, some producers may decide to stop pumping.
"Operators may prefer to continue producing oil at a loss rather than stop production—especially for large projects such as oil sands and mature fields in the North Sea."-Robert Plummer, analyst, Wood Mackenzie
Below $40 a barrel, the next likely production slowdown would come from Canadian tar sands fields, which start to lose money when the Brent price hits the high $30 range. But turning the flow off and restarting it again is a complex process, involving injecting steam into the ground, which makes it costly to restart, according to Wood Mackenzie. On the other hand, fuel represents a major cost for oil sands production, so lower oil prices could help lower overall production costs.Read MoreWhat makes Canada's oil sands worth the trouble
In the U.K., North Sea oil fields start to lose money below $50 a barrel, according to the analysis. But many of them are older fields reaching the end of their lives, so stopping production could mean slowing down for good. That decommissioning process can be expensive, so some companies may decide to operate at a small loss rather than spend the money to close down operations, the analysts noted.
Production costs also include government taxes and royalties, which could be reduced or suspended if those governments want to keeping production going. Some of the "heavy oil" projects in Latin America, including those in Venezuela and Colombia, become money losers at lower prices, which could spur those governments to offer some kind of royalty relief, the analysts said.
Overall, the analysis found, the impact of $40 oil on global production would be very small, based on data covering some 75 million barrels a day of production. At $50-a-barrel Brent, only 190,000 barrels a day is unprofitable, representing just 0.2 percent of global supply. Seventeen countries supply oil that is cash negative at $50, with the main contributors being the United Kingdom and the United States.
At $45 a barrel, only 400,000 barrels per day, or just 0.4 percent of global supply, are unprofitable. Half of that is from conventional onshore production in the U.S. And at $40 a barrel, just 1.5 million barrels per day represents unprofitable production, or just 1.6 percent of global supply. Most of that production comes from several oil sands projects in Canada.
Read MoreCramer: 'Get negative everything' oil
Even when a field becomes cash negative, it doesn't necessarily prompt producers to shut down right away, said Plummer.
"The first response is usually to store oil produced in the hope that the oil can be sold when the price recovers," he said. "Operators may prefer to continue producing oil at a loss rather than stop production, especially for large projects such as oil sands and mature fields in the North Sea."
PUBLISHED: 21:56,GMT 12 January 2015 | UPDATED: 21:56, 12 January 2015
Analysts at the US bank, led by Jeffrey Currie, said it now expects Brent to fall to $42 a barrel in the next three months – nearly half the $80 it was previously predicting.
It cut its six month forecast for WTI from $75 a barrel to just $39 a barrel.‘We are revising down our three, six and 12-month price forecasts for Brent to $42, $43 and $70 respectively, from $80, $85 and $90, and for WTI to $41, $39 and $65 from $70, $75 and $80,’ Currie and his colleagues wrote in a note to clients.
Goldman said Brent would settle at $70 a barrel from 2016, lower than the $90 it previously forecast, while WTI is forecast to be $65 a barrel rather than $80.
The oil price has tumbled in recent months, wreaking havoc on the financial markets, as supply soars at a time of weak demand.
The US is pumping oil at the fastest pace for more than three decades as the shale boom takes off.
Despite the risk of oversupply, the Organisation of Petroleum Exporting Countries oil cartel has refused to cut production to prop up prices.
Goldman said crude would have to remain at around $40 a barrel for some time in order to curtail shale production, curb supply and rebalance the market.
‘We believe prices need to stay lower for longer,’ the report said. ‘The search for a new equilibrium in oil markets continues.’
+2
Taking the plunge: The price of oil crashed to a six-year low last night as Goldman Sachs warned it will fall below $40 a barrel this summer
+2
Brent crude, the main international benchmark, fell to $47.32 in London while the West Texas Intermediate US measure traded below $46 – the lowest levels since early 2009
It is hoped that the fall in the oil price will boost the UK and global economies this year as the lower cost of petrol in particular leaves households with more money to spend and eases pressure on businesses.
Alastair Winter, chief economist at Daniel Stewart, said lower oil prices ‘are a special boon as they in effect are a cut in a tax on consumption’.
Official figures published today look set to show inflation in the UK has fallen below 1pc for the first time since mid-2002 on the back of the oil price crash.
The figures for December will be hailed by ministers as evidence that the squeeze on family finances is finally coming to an end as wages rise faster than prices.
Rob Wood, chief UK economist at Berenberg Bank, said the slump in the oil price provides ‘a big direct and indirect stimulus for the UK’ by lowering the cost of petrol and giving the Bank of England space to leave interest rates at 0.5 per cent for some time to come.
‘Low inflation represents a serious boost to consumers’ spending power,’ he said.
‘For users of energy the oil price rout is the equivalent to a huge tax cut, and it is driving even lower borrowing costs as markets push out the likely timing of the first interest rate hike in the UK.’
Analysts at the US bank, led by Jeffrey Currie, said it now expects Brent to fall to $42 a barrel in the next three months – nearly half the $80 it was previously predicting.
It cut its six month forecast for WTI from $75 a barrel to just $39 a barrel.‘We are revising down our three, six and 12-month price forecasts for Brent to $42, $43 and $70 respectively, from $80, $85 and $90, and for WTI to $41, $39 and $65 from $70, $75 and $80,’ Currie and his colleagues wrote in a note to clients.
Goldman said Brent would settle at $70 a barrel from 2016, lower than the $90 it previously forecast, while WTI is forecast to be $65 a barrel rather than $80.
The oil price has tumbled in recent months, wreaking havoc on the financial markets, as supply soars at a time of weak demand.
The US is pumping oil at the fastest pace for more than three decades as the shale boom takes off.
Despite the risk of oversupply, the Organisation of Petroleum Exporting Countries oil cartel has refused to cut production to prop up prices.
Goldman said crude would have to remain at around $40 a barrel for some time in order to curtail shale production, curb supply and rebalance the market.
‘We believe prices need to stay lower for longer,’ the report said. ‘The search for a new equilibrium in oil markets continues.’
+2
Taking the plunge: The price of oil crashed to a six-year low last night as Goldman Sachs warned it will fall below $40 a barrel this summer
+2
Brent crude, the main international benchmark, fell to $47.32 in London while the West Texas Intermediate US measure traded below $46 – the lowest levels since early 2009
It is hoped that the fall in the oil price will boost the UK and global economies this year as the lower cost of petrol in particular leaves households with more money to spend and eases pressure on businesses.
Alastair Winter, chief economist at Daniel Stewart, said lower oil prices ‘are a special boon as they in effect are a cut in a tax on consumption’.
Official figures published today look set to show inflation in the UK has fallen below 1pc for the first time since mid-2002 on the back of the oil price crash.
The figures for December will be hailed by ministers as evidence that the squeeze on family finances is finally coming to an end as wages rise faster than prices.
Rob Wood, chief UK economist at Berenberg Bank, said the slump in the oil price provides ‘a big direct and indirect stimulus for the UK’ by lowering the cost of petrol and giving the Bank of England space to leave interest rates at 0.5 per cent for some time to come.
‘Low inflation represents a serious boost to consumers’ spending power,’ he said.
‘For users of energy the oil price rout is the equivalent to a huge tax cut, and it is driving even lower borrowing costs as markets push out the likely timing of the first interest rate hike in the UK.’
Thanks everyone for having a good discussion about this. Refreshing. How long do they expect the current prices to stay where they are at? I understand what everyone is saying but isn't it just a matter of time before the industry manipulates itself to increase the demand again? Forgive me as I am a novice to all this. I understand what people are saying about a low oil price but after years of what seems like record profits and getting what feels like up the ass it's nice to see. I will enjoy it for a while but if it helps the country long term then hope it meets in the middle.
Nice post.
Dont know anymore.
Im currently about 30$ off on my bottom call.
Not going to predict anymore.
But what I am going to do is sell every single non oil stock I own and get heavy into DNR and SGY
Those stocks are getting killed right now.
Both are awesomely run companies.
Yea especially DNR. Stock basically going down with the oil prices but they are loaded. They will probably spend some of their billions on some discounted fields just like they did last time the oil prices went down in 1997 and use their Co2 injection techniques that only they have access to to bring back some old production on the cheap.
I believe the lower fuel costs are helping economic growth, which is consistent with my argument that a big reason for our extended economic malaise of the past six years was high energy costs, something Obama actually espouses (he thinks higher energy costs are good for mankind and will save our planet)
If you look at post 24, you can see a correlation between our worst economic times (the late 70's and the past 7 years) and energy costs. Ironically, both liberal democratic presidents presiding over those economic times espoused the same energy policies, along with a larger federal government and federal government solutions for everything (they actually think they're so damn smart, they can micro manage the entire planet. Which is a sign of extreme ignorance)
If you look at post 24, you can see a correlation between our worst economic times (the late 70's and the past 7 years) and energy costs. Ironically, both liberal democratic presidents presiding over those economic times espoused the same energy policies, along with a larger federal government and federal government solutions for everything (they actually think they're so damn smart, they can micro manage the entire planet. Which is a sign of extreme ignorance)
people like to work, lower energy costs helps that single most important economic variable
and with people working, demand will increase putting pressure on energy prices
the economy has checks and balances, but they get all fucked up when politicians think they can micro manage the world and start creating more government to do just that
PS: and that personal attack on Scott is straight out of deep left field, totally uncalled for.
trying to kill the competition, it's happened before
Tougher to price fix when the various producers have competing interests. It'll likely be volatile for a little while but tough to predict that type of thing long-term other than to say wayyy long-term when other countries become more developed there will be more demand. Supply might be 2-3x of what it is right now by then though, who knows.
All of these companies have energy consultants who study every variable of this every single day for a living and really nobody predicted anything like this. Then when you think of the main driver of this result, it is basically just because OPEC kept their same policy. Not even changing their policy or doing anything drastic, just keeping it the same exact way it has been. Seemed pretty easy to predict beforehand doesn't it? Guess not
Why?
Don't see any reason this would be the bottom and even if it was it doesn't mean prices will recover anytime soon. The world is overproducing and a few of the biggest oil consuming nations are not increasing demand.
If you look at the top 15-20 oil producing nations, the only way any of them seem likely to cut would be out of pure necessity. I could see it being like this for the next 18-24 months and possibly beyond.
that being said...
JORDAN EDGCOMB / AP
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DRILL BABY DRILL! 6:00 AM DEC 18, 2014
[h=1]The Conventional Wisdom On Oil Is Always Wrong[/h]By BEN CASSELMAN
In 2008, I moved to Dallas to cover the oil industry for The Wall Street Journal. Like any reporter on a new beat, I spent months talking to as many experts as I could. They didn’t agree on much. Would oil prices — then over $100 a barrel for the first time — keep rising? Would post-Saddam Iraq ever return to the ranks of the world’s great oil producers? Would China overtake the U.S. as the world’s top consumer? A dozen experts gave me a dozen different answers.
But there was one thing pretty much everyone agreed on: U.S. oil production was in permanent, terminal decline. U.S. oil fields pumped 5 million barrels of crude a day in 2008, half as much as in 1970 and the lowest rate since the 1940s. Experts disagreed about how far and how fast production would decline, but pretty much no mainstream forecaster expected a change in direction.
That consensus turns out to have been totally, hilariously wrong. U.S. oil production has increased by more than 50 percent since 2008 and is now near a three-decade high. The U.S. is on track to surpass Saudi Arabia as the world’s top producer of crude oil; add in ethanol and other liquid fuels, and the U.S.is already on top.
The standard narrative of that stunning turnaround is familiar by now: Even as Big Oil abandoned the U.S. for easier fields abroad, a few risk-taking wildcatters refused to give up on the domestic oil industry. By combining the techniques of hydraulic fracturing (“fracking”) and horizontal drilling, they figured out how to tap previously inaccessible oil reserves locked in shale rock – and in so doing sparked an unexpected energy boom.
That narrative isn’t necessarily wrong. But in my years watching the transformation up close, I took away a lesson: When it comes to energy, and especially shale, the conventional wisdom is almost always wrong.
It isn’t just that experts didn’t see the shale boom coming. It’s that they underestimated its impact at virtually every turn. First, they didn’t think natural gas could be produced from shale (it could). Then they thought production would fall quickly if natural gas prices dropped (they did, and it didn’t). They thought the techniques that worked for gas couldn’t be applied to oil (they could). They thought shale couldn’t reverse the overall decline in U.S. oil production (it did). And they thought rising U.S. oil production wouldn’t be enough to affect global oil prices (it was).
Now, oil prices are cratering, falling below $55 a barrel from more than $100 earlier this year. And so, the usual lineup of experts — the same ones, in many cases, who’ve been wrong so many times in the past — are offering predictions for what plunging prices will mean for the U.S. oil boom. Here’s my prediction: They’ll be wrong this time, too.
To be fair, the drop in oil prices is still too new for the experts to have settled on a clear consensus of what it will mean for U.S. producers. But the range of opinions is narrow, ranging from “production will be keep growing, but more slowly” to “it won’t have much effect at all.”[SUP]1[/SUP] Author and analyst Daniel Yergin, long the embodiment of the conventional wisdom on all things energy[SUP]2[/SUP], put it this way in a Wall Street Journal op-ed late last month, when oil was trading for just under $70 a barrel:
It is now clear that the new U.S. production is more resilient than anticipated. … True, with prices now near or below $70 a barrel, U.S. companies are looking hard at their investment plans — where and how much to cut or postpone. But it will take time for these decisions to affect supply. U.S. oil output will continue to rise in 2015.
I don’t take issue with anything Yergin is saying here. In fact, it makes sense. But that’s the thing about the conventional wisdom: It always makes sense at the time. It’s only later that we can see all the reasons it was wrong.
I don’t yet know why the conventional wisdom will be wrong this time, but I can guess. Not about what will happen — I’m no better at these predictions than anyone else — but about the sources of error. Here are a few of the most likely candidates:
No one has any idea what oil prices will do: In July 2008, my Journal colleague Neil King asked a wide range of energy journalists, economists and other experts to anonymously predict what the price of oil would be at the end of the year. The nearly two dozen responses ranged from $70 a barrel at the low end to $167.50 at the high end.[SUP]3[/SUP] The actual answer: $44.60.[SUP]4[/SUP]
It isn’t surprising that experts aren’t good at predicting prices. Global oil markets are a function of countless variables — geopolitics, economics, technology, geology — each with its own inherent uncertainty. And even if you get those estimates right, you never know when a war in the Middle East or an oil boom in North Dakota will suddenly turn the whole formula on its head.
But none of that stops television pundits from making confident predictions about where oil prices will head in the coming months, and then using those predictions as the basis for production forecasts. Based on their track record, you should ignore them.
Drilling economics are complicated: In recent weeks, Wall Street analystshave published estimates of “break-even prices” for various U.S. oil fields. According to Goldman Sachs, for example, companies need at least $80 oil to make money in Texas’s Eagle Ford shale but only $70 in North Dakota’s Bakken shale. In theory, that makes it easy to see where companies will keep drilling at a given price and where they’ll pull back.
The reality is far more complicated. Not all parts of an oil field are created equal. Wells drilled in a “sweet spot” can be an order of magnitude better than those in less promising areas. Companies will keep drilling in the best areas long after they’ve pulled the plug on more marginal prospects. Break-even prices also change along with the price of oil. As prices fall and companies drill less, that leaves more rigs and equipment available, pushing down the price of drilling a well and allowing companies to stay profitable even at lower oil prices.
With oil under $60 a barrel, it’s a fair bet that many U.S. wells are now unprofitable. But that doesn’t mean companies will stop drilling them, at least right away. Companies often have contracts for rigs and would rather keep drilling than pay a penalty. They also have contracts for the land where they drill. If they don’t drill within a certain period, they lose the right to the land altogether.
Even when drilling does slow, production won’t necessarily follow. Wells keep producing for decades after they’ve been drilled, although at ever-declining rates. Companies prioritize their most promising projects, so the wells that do get drilled will be the best ones. And technology keeps improving, so companies can coax more oil out of each well. Natural gas provides an instructive example: The U.S. is drilling half as many gas wellstoday as it was five years ago and producing a third more gas.
Drilling finances are even more complicated: One thing I learned in my years covering the industry is that oil companies, and especially small oil companies, will keep drilling for as long as they can get the money to do so.[SUP]5[/SUP]That means the key variable in forecasting oil production isn’t drilling costs or even oil prices; it’s Wall Street.
In recent years, investors have handed energy companies half a trillion dollars in loans. That’s partly because of all the promising new oil fields in North Dakota and Texas, but it’s also because with interest rates near zero, investors are hungry for returns wherever they can find them. Now the Federal Reserve is talking about raising interest rates, which could kill the bond bubble, even as falling oil prices make those loans look riskier than they used to. If Wall Street turns off the money spigot, drilling will slow down no matter what oil prices do.
And then there’s politics: Why are oil prices falling? The short answer is lots of supply (the U.S. oil boom) and not much demand (a weak global economy). The longer answer is all about the Organization of Petroleum Exporting Countries. OPEC usually tries to keep prices high by limiting supply. But right now the cartel — or at least its dominant member, Saudi Arabia — appears content to let prices fall. The Saudis apparently think they can weather the storm of low prices better than companies in the U.S., where oil is much more expensive to produce.
But the policy has created divisions within OPEC, and no one knows when or if the cartel will start pulling back production. Tumbling prices arewreaking havoc on Russia’s economy, and they could easily lead to political unrest in other countries as well.
Oh, right, and geology: It’s easy to forget, but just a few years ago people were fretting about “peak oil,” the idea that global oil production had reached its maximum capacity and was doomed to start falling. The shale boom pushed those fears out of the mainstream, but the underlying questions remain. The shale boom is still young, and it was unclear how long it could last even when prices were higher. The U.S. government’s official production forecasts are subject to an almost comical level of uncertainty, and independent researchers have called even those estimates into question. The government didn’t see the boom coming, after all; there’s no guarantee it will see the end coming, either.
[h=3]FOOTNOTES[/h]
FILED UNDER DRILL, DRILL BABY DRILL!, ENERGY, FRACKING, GAS, HYDRAULIC FRACTURING,OIL, OPEC, PUNDITRY
[h=3]BEN CASSELMAN @bencasselman [/h]Ben Casselman is FiveThirtyEight’s chief economics writer.
