The U.S. benchmark crude price, down more than $60 since June to below $45 yesterday, is on the way to this next threshold, said Societe Generale SA and Bank of America Corp. And Goldman Sachs Group Inc. says that West Texas Intermediate needs to remain near $40 during the first half to deter investment in new supplies that would add to the glut.
“The markets are continuing to price in huge oversupply in the first half of 2015,” Mike Wittner, head of research at Societe Generale SA in New York, said on January 12. “We’re going to go below $40,” Wittner added.
Oil is seeking a “new equilibrium” as the Organisation of Petroleum Exporting Countries (OPEC) abandons its role of keeping supply and demand aligned, according to Goldman. Prices are poised to drop further, testing the ability of US shale drillers to keep pumping.
WTI fell as low as $44.20 a barrel on the NYME Tuesday and traded at $45.57 at 9:58 a.m. London time. The U.S. benchmark has dropped 15 percent this month, extending a 46 percent plunge last year that was the worst since the 2008 financial crisis.
OPEC is trying to maintain its share of the global oil market against the rise of US output. Suhail Al Mazrouei, United Arab Emirates’ energy minister, reiterated that shale producers will capitulate before OPEC to lower prices, the latest in more than a dozen comments from Gulf members aimed at hastening oil’s slide and lowering non-OPEC supply.
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The group upheld its target of 30 million barrels a day at a meeting in Vienna on November 27.
The rout may continue to $35 a barrel in the “near term” because both oil supply and demand will have a delayed reaction to falling prices, Francisco Blanch, head of commodities research at Bank of America in New York, said in a report on January 6.
The US is pumping oil at the fastest pace in more than three decades, helped by a drilling boom that’s unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota. U.S output expanded to 9.14 million barrels a day in the week ended December 12, the most since at least 1983, according to the U.S. Energy Information Administration.
With Saudi Arabia and other OPEC nations no longer fine-tuning supply, reductions in investment in new production will be the instrument for removing excess output, Jeffrey Currie, head of commodities research in New York at Goldman said in a report on January 11. This means the collapse will be deeper and the recovery slower than in previous slumps, he said.
Operating cash costs for many non-OPEC projects are below $40 a barrel and some producers will be able to keep going because they have locked in forward prices, or are supported by tax breaks or weaker domestic currencies, said Blanch, who on November 27 predicted that WTI, then above $70 a barrel, could plunge to $50. An increase in demand in response to lower prices will take about six months, he said.
“An impatient oil market, wanting to see production adjustments as soon as possible, could push WTI oil prices to $40 a barrel,” Giovanni Staunovo, an analyst at UBS AG in Zurich, said. Investment “cutbacks and less drilling activity are required to see a stall in North American supply growth. This is unlikely to happen in a meaningful way before the second half,” he said.
