by Compiled from Wire Services
Jan 14, 2016 12:00 am
China's trade data helped slumping oil prices to recuperate to the $30 per barrel barrier, however, analysts see further decline in the medium-term
Oil prices rebounded in Asia Wednesday, halting a plunge that saw crude fall below $30 a barrel for the first time in more than 12 years, but analysts warned of further pressure on the commodity.
Investors have an eye on the release later in the day of U.S. commercial crude stockpiles data, which is expected to show another increase, further exacerbating a global supply glut that has hammered the market for 18 months.
U.S. benchmark West Texas Intermediate (WTI) for delivery in February rose 38 cents, or 1.25 percent, to $30.82 per barrel at around 0600 GMT. European benchmark Brent rose 26 cents, or 0.84 percent, to $31.12. On Tuesday, WTI fell at one point to $29.93, a level last seen in December 2003, although it was given a lift later by a private report pointing to a drop in inventories.
However, experts warned that prices remained fragile. "The supply and demand landscape for oil continues being bearish as prices continue to take discounts," Daniel Ang, an analyst with Phillip Futures in Singapore said in a market commentary. "U.S. oil supply continues to remain strong."
Bernard Aw, a market strategist with IG Markets Singapore said the long-term trend is for prices to fall, with the supply glut not showing any let up.
Oil traders and Wall Street analysts expect further declines in oil prices in the coming weeks. Several have predicted that prices will fall below $30 a barrel and even approach $20 a barrel.
A boom in U.S. oil production thanks to new drilling technology helped push global supplies higher in recent years. Other major oil producers and exporters in the Middle East and elsewhere have declined to reduce their own output in an attempt to push prices back up. Iran, trying to emerge from punishing economic sanctions, is looking to increase exports in the coming months, which could add further to global oil stockpiles.
The Energy Department said U.S. crude oil inventories "remain near levels not seen for this time of year in at least the last 80 years." It says global supplies exceed global demand by about 1 million barrels per day on average. Economists at the Federal Reserve Bank of Dallas believe excess inventories won't begin falling until 2017.
The higher supplies and lower prices haven't stimulated a sharp rise in demand. Most of the increase in world oil demand over the past several years has come from China, but signs are pointing to much slower economic growth there, which in turn reduces demand for fuels made from crude.
Disappointing reports last week about China's manufacturing sector and a fall in the yuan's value triggered a global stock sell-off and an even more dramatic decline in the price of oil and other commodities.
The first five days of the year marked the worst start of a year for oil in history, according to S&P Dow Jones Indices, and oil has only fallen further since.
But prices are expected to rise sooner or later. Tension between Saudi Arabia and Iran has increased in recent weeks, and Middle East turmoil often causes prices to rise because traders worry about a potential disruption in supplies in the world's most important oil region.
And just as $100 oil encouraged the new production that contributed to this plunge in prices, $30 oil is discouraging the big investment needed for exploration and production for the future. The number of rigs drilling for oil in the U.S. has fallen by more than two-thirds, to 516 last week from an October 2014 peak of 1,609, according to a closely-watched count by the drilling services company Baker Hughes.
Eventually, analysts say, the supply will fall below demand and prices will rise. Fadel Gheit, an analyst at Oppenheimer & Co, thinks oil will eventually rise and settle into a range between $50 and $70 a barrel but not anytime soon. "The longer it remains low, the more violent the reaction to the upside is going to be," he says.
Oil-reliant OPEC member Nigeria on Tuesday called for an emergency meeting of the grouping to address collapsing prices, which have rattled world stock markets and hammered energy firms. The Nigerian petroleum resources minister, Emmanuel Ibe Kachikwu, said he expects an extraordinary meeting of the group in "early March" to discuss the crisis. "We did say that if it hits the $35 (per barrel level), we will begin to look (at)... an extraordinary meeting," Kachikwu said at the Gulf Intelligence UAE Energy Forum.
Poorer members of the Organization of the Petroleum Exporting Countries have been clamoring for a cut in the high production levels in a bid to drive prices higher. But influential OPEC members led by Saudi Arabia have rejected any such move, preferring to fight for market share against rival producers, particularly the United States.
Crude accounts for 90 percent of Nigeria's export earnings and 70 percent of overall government revenue.
Lower crude prices are leading to lower prices for gasoline, diesel, jet fuel and heating oil, giving drivers, shippers, and many businesses a big break on fuel costs. The national average retail price of gasoline is $1.96 a gallon in the U.S. and motorists are saving every time they fill up. The Energy Information Administration figures that the average U.S. household saved $660 on gasoline in 2015 compared the year before, and gasoline is expected to fall another 16 percent in 2016. Tuesday the EIA forecast that gasoline will average $2.03 a gallon for 2016, the lowest since 2004, from $2.43 last year. Airlines, big users of jet fuel, have posted record profits, and shippers and other businesses are also saving from cheaper energy.
On Tuesday the U.S. Energy Department lowered its expectations for crude oil and most fuels for this year and next. The department now expects U.S. crude to average $38.54 a barrel in 2016.
But layoffs across the oil industry are mounting, and oil company bankruptcies are expected to soar. BP announced layoffs of 4,000 workers on Tuesday. Oppenheimer's Gheit says as many as half of the independent drilling companies working in U.S. shale fields could go bankrupt before oil prices stabilize.
About 17,000 oil and gas workers in the U.S. lost their jobs in 2015, but if you include oilfield support jobs the number is about 87,000, according to Michael Plante, an economist at the Dallas Fed who has written about the effect of oil prices on the economy. Even so, economists say low oil prices are still a net benefit for the U.S. economy.
"Consumers have more money in their pocketbooks," says Amy Myers Jaffe, an energy consultant who teaches at the University of California, Davis. And for businesses, "I can hire more people or buy new equipment because I no longer have to spend that money on energy."