Oil markets downward spiral 'unbriddled'

Thw carnage continues! Markets are in free fall. Benchmark US oil price dropped this week below $60 a barrel for the first time since July 2009, whereas Brent for January settlement appeared hovering at around $63 on the London-based ICE Futures Europe Exchange.

This was its lowest close since July 16, 2009. Crude took this fresh drubbing when, in view of the surging US output, OPEC had to reduce the estimates of call on its crude for 2015 and Kuwait offered new discounts to Asian customers, offering the biggest discount to its Asian customers since December 2008. 

It announced setting the price of its crude at $3.95 a barrel below a Middle East benchmark for next month.

Growing US crude output continued to add to the glut.  US production expanded to 9.12 million barrels a day in the week ending December 5, the Energy Information Administration reported. That’s the fastest rate in weekly records that started in January 1983, according to the EIA.

Major stakeholders are also getting another message, clearly and boldly – global crude demand growth is softening. Demand for crude from the Organization of Petroleum Exporting Countries will drop next year by about 300,000 barrels a day to 28.9 million, the least since 2003, OPEC said in a report last week. 

In its monthly oil report, OPEC forecast for call on its output was down 280,000 bpd from its previous expectation and over 1 million bpd less than it is currently producing. OPEC output was 30.56 million barrels a day in November, exceeding its target for a sixth straight month, a Bloomberg survey of companies, producers and analysts showed.

The US Energy Information Administration too has revised down its forecast for global consumption by 200,000 barrels per day next year. According to the EIA’s estimates, global oil consumption will climb by only 880,000 bpd next year. 

Previously it had assumed an increase of 1.12m bpd. At the same time the EIA has said that US oil production growth would slow too and it now expects US oil production to only increase by between 130,000 bpd and 720,000 bpd, to average 9.3 million bpd in 2015.

And in the meantime, adding to the overall gloom is the Saudi insistence that crude is a cyclical market and that it would ultimately stabilize without any interference in the form of output cut. “Why should I cut production?” Minister Al-Naimi asked reporters in Lima, Peru. 

“This is a market and I’m selling in a market,” he insisted, reiterating that the Kingdom produced 9.6 to 9.7 million bpd of crude in November, a figure consistent with October estimates. 

“That is not going to change unless other customers come and say they want more oil,” he underlined. Asked whether the market was oversupplied, he said, “you can see from the price. You know what a market does for any commodity: It goes up and down and up and down.” 

A bearish sentiment is hence getting hold of the markets. Crude market prices will slump to $50 a barrel over coming months as market forces shake out the weakest producers, Bank of America is now warning. 

With $60 mark already there, some others too are now saying that $50 is in sight. “That’s not out of the question. It’s happening faster than I thought it would happen. I was calling for $50 but I was envisioning that happening in February,” said John Kilduff, oil analyst at Again Capital.

“It seems like the market can’t find a bottom yet,” said Gene McGillian, analyst at Tradition Energy was quoted as saying. “Right now the market is in free fall status. ... It appears we’re going to break $60 and get near the $50 mark.”

Analysts at investment bank Morgan Stanley too are warning that oil could fall to $43 a barrel in the second quarter of next year unless output is reduced. “Without OPEC intervention, markets risk becoming unbalanced, with peak oversupply likely in the second quarter of 2015,” it said in a report.

Morgan Stanley also slashed its 2015 base case forecast for Brent to $70 from $98 a barrel and for 2016 to $88 from $102 a barrel. In its bear-case scenario, the bank sees the crude benchmark falling to a low of $43 a barrel in the second quarter of next year.

A top Iranian oil official too underlined at an industry conference in Dubai last week that unless leading producers can find common ground, the world could be looking at prices as low as $40 a barrel in the coming months.

“Any break in OPEC solidarity or a price war will lead to an enormous price dive-shock” that would push prices to that level, Mohammad Sadegh Memarian, head of market analysis for Iran’s oil ministry, told the audience at the conference in Dubai.

Trade data from China has also not been very encouraging. The growing evidence of economic weakness in the world’s No. 2 oil consumer seems likely to pile more pressure on crude markets. China’s imports fell 6.7 percent in November from a year earlier, coming in well below expectations and adding to concerns the world’s second-largest economy could be facing a sharper slowdown. 

Oil prices will stay around $60 a barrel for the next five years as China’s economy cools down, economist Andy Xie, the former Morgan Stanley and IMF senior economist told CNBC on Thursday.

Oil prices had been rising because of China’s boom, Xie said in CNBC’s “Squawk Box” program. China is now transitioning from a 15-year super cycle that built up a massive industrial machine, and the economy must cool down to digest overinvestment, which will drag down commodity prices, he said. 

“When China goes into normal situation, I think that the oil price will become normal, so $60 would be the normal price for the next five years or so,” he said, adding over the next four to five years, China will experience deflation and sluggish demand.

Markets continue to slide, as gloom is taking over. Sentiments stand altered – all around!