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Crude Oil Closes in on Six Year Lows

Posted by Joseph Trevisani on Aug 6, 2015 10:28:00 AM

West Texas Intermediate clipped through $45 on the NYMEX as the imbalance between supply and demand, concerns about a global economic slowdown, a rising dollar and uncertainty in China kept both sides of the pricing equation deeply negative for crude oil. 

Crude prices have fallen 30% in the past three months and a 55% in a year.  In March the cost of WTI briefly fell to $42.03, the post-recession low but the rebound then was swift, within 6 trading session it was back above $50. This time the decline looks set to linger for many months. In January 2009 crude touched $41.68 completing the violent collapse from $140.00 just six months earlier.

American oil production may have peaked in March at 9.69 million barrels a day, EIA data has it falling to 9.51 million barrels in May. But major producers around the world, Saudi Arabia, Russia and Venezuela among others, have powerful incentives to keep pumping and gain, if possible, market share.  If the pending agreement with Iran is approved by the U.S Congress then Iran will rejoin the sanctions free oil producing community as well.

American shale oil producers also have considerable financial motivation to continue pumping from already producing wells, as the sunk costs of drilling are mitigated by sales.

Goldman Sachs Group Inc., said in an investment note that the global oversupply of crude oil is about 2 million barrels a day. 

In the past OPEC had been able to support prices with production cuts. This time it is unlikely to be able to force cooperation from its members, particularly when the largest producer, Saudi Arabia, is pumping at record volumes and has said it will continue to do so. 

Despite the rapid drop in crude prices which would normally constrict supply, political conditions in the Middle East and financial conditions for national producers in Russian, Venezuela and elsewhere and for U.S. independent producers should keep the pump jacks turning across the world.  

If supply is slated to remain plentiful, demand is weak and likely to fall as the world weathers an economic decline of unknown severity.

The global economic slowdown, clear in Europe, of unclear but substantial dimensions in China and with the United States unable to break out of its post-financial crisis GDP doldrums, will inhibit demand at least through the end of the year. 

Last month the IMF cuts it forecast for global economic growth to 3.3 percent for this year, 0.2 percent below its April estimate. The biggest reduction was for the United States which the fund now expects to grow at 2.5 percent this year, down from 3.1 percent in April. The IMF suggested that American sluggishness is beginning to affect Canada and Mexico. 

Adding to the economic burdens on oil prices the U.S dollar, the pricing agent for oil worldwide, has had an excellent run since last summer.  

The greenback has gained 19 percent against her euro, 18 percent versus the Japanese yen and the trade weighted dollar index has risen 13 percent.

As the worth of the dollar increases it takes fewer of them to buy a barrel of crude and though the currency translation is not one for one it is one of the important directions signals for oil prices.

Oil is also part of the general collapse in commodity prices in the past year.  

From a high in April 2014 of 138.67, the Bloomberg commodity index of 22 raw materials has fallen 35 percent to 90.55 a thirteen and half year low. Eighteen of its components have declined at least 20 percent responding to many of the same overproduction and demand issues that have plagued crude oil.

The current reign of expensive energy began in 1973 with the OPEC oil embargo and assumed modern proportion of volatility and price speculation with the opening of oil trading contracts in London in 2000 and New York.

That era may finally be coming to an end done in by over production, alternative sources and efficiencies prompted by 15 years of costly energy. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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