Oil slump yet to run its course

Oil prices plunged again Wednesday by more than 5 per cent as investors paid more attention to signs that global stockpiles are growing than to increasing instability in the Middle East and North Africa.

The decline in the global Brent oil benchmark price to below $US35 a barrel, the lowest level since the depths of the 2008-09 economic downturn and a decline of nearly two-thirds since summer 2014, helped push stock markets lower.

The Standard & Poor's 500 index, the main benchmark for the US stock market, declined 1.3 percent Wednesday and breached the psychologically important 2,000 level to close at 1,990.26.

Among the steepest declines, though, were shares of some independent oil and gas companies, including Apache and Southwestern Energy, which declined by more than 10 percent.

Oil prices plunged despite reports that terrorists affiliated with the Islamic State had attacked oil storage facilities in two major Libyan ports, setting fire to seven tanks. The continuing sabotage of the Libyan oil industry was another blow to the prospects that Libya, North Africa's primary oil producer, can reverse sagging exports.

Adding to the uncertainty, Saudi Arabia and Iran continued their sabre-rattling in the Persian Gulf, threatening a spread of hostilities in Iraq, Bahrain and other countries with deep sectarian divides.


But traders shrugged off the geopolitical risks and looked to the fundamentals of supply and demand.

Economic data released in China this week showed slower growth, while the US Energy Department reported that gasoline stockpiles last week rose by 10.6 million barrels, the largest weekly amount since 1993, to 232 million barrels.

"Oversupply will continue to hold down commodity prices in 2016," said Terry Marshall, a senior vice president at Moody's. "OPEC and many non-OPEC oil producers continue to produce without restraint as they battle for market share. Increased production has vastly exceeded growth in oil consumption, including from major consumers like China, India and the US."

The glut in oil, and natural gas, has sent the oil industry into its worst tailspin since the 1990s. Forty US and Canadian oil companies collapsed in the last year or so, and several new industry reports have predicted unrelenting pain in 2016.

A new report by Moody's Investors Service projected a rise in company defaults and a decline in capital spending of 20 to 25 percent, a drop in investment nearly as large as that last year.

Analysts at Moody's and other consultant firms are predicting that companies will increasingly be forced to sell assets, particularly because a growing number of them are under pressure to meet debt payments and are losing price hedges that buttressed their balance sheets in the last two years of slumping prices.

"Mounting distress will force more companies to market," said Luke Parker, corporate analysis research director at Wood Mackenzie a consultancy. "Balance sheets will become ever more stretched without asset sales to balance the books."

Oil executives have been equally downbeat about 2016, especially as it compares with recent years in which producers nearly doubled output as they learned to produce in vast shale fields with hydraulic fracturing that blasted through hard rock with water, sand and chemicals.

"We're in a capital-constrained world," Darrell E. Hollek, executive vice president for onshore exploration and production at Anadarko Petroleum, said. "We won't have the cash flow with oil and gas prices where they are."

Many of the factors that reduced oil prices by a third in 2015 show no signs of changing. Saudi Arabia, Russia and several other important oil suppliers are producing at record or near-record levels to sustain their income and market share in global markets, particularly China. Iran hopes to export more than 500,000 barrels a day once nuclear sanctions are lifted, probably this year.

US oil producers have decommissioned more than half of their rigs, and production growth has been halted since last April when output peaked at nearly 9.6 million barrels a day. But production is not falling fast enough to balance the market.

Oil and Gas Journal predicts that average output will drop to 8.9 million barrels a day this year, modestly below current levels but still 200,000 barrels a day higher than the average in 2014.

A big reason US production is so resilient is that offshore Gulf of Mexico production continues to recover from the 2010 BP Deepwater Horizon disaster and subsequent federal exploration moratorium with new wells continuing to come online. Meanwhile, shale drilling continues to become more efficient.

New York Times