Oil Falls as U.S. Producers Seen Standing Ground Amid OPEC Fight

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December 16, 2014

Oil extended losses from a five-year low amid speculation that U.S. producers may further increase output as they battle OPEC for market share and as a Chinese manufacturing gauge missed estimates.

December 16, 2014

Oil extended losses from a five-year low amid speculation that U.S. producers may further increase output as they battle OPEC for market share and as a Chinese manufacturing gauge missed estimates.

Futures dropped as much as 1.2 percent in New York, after closing yesterday at the lowest level since May 2009. U.S. crude drillers are benefiting as costs fall almost as quickly as prices, according to Goldman Sachs Group Inc. Brent in London, the benchmark grade for more than half the world’s oil, may decline to $50 a barrel in 2015, a Bloomberg survey of analysts showed. A preliminary Purchasing Managers’ Index in China slid to a seven-month low in December.

Oil has slumped almost 45 percent this year as the Organization of Petroleum Exporting Countries sought to defend market share amid a U.S. shale boom that’s exacerbating a global glut. The group, responsible for about 40 percent of the world’s supply, will refrain from curbing output even if crude drops to $40 a barrel, according to the United Arab Emirates.

“It seems like the market is no longer able to respond to the issue of oversupply,” Hong Sung Ki, a commodities analyst at Samsung Futures Inc. in Seoul, said by phone. “On the demand side, the global economy continues to slow while it takes time for U.S. shale production to pull back on the supply side.”

West Texas Intermediate for January delivery fell as much as 66 cents to $55.25 a barrel in electronic trading on the New York Mercantile Exchange and was at $55.55 at 12:18 p.m. Singapore time. It decreased $1.90 to $55.91 yesterday. The volume of all futures traded was about 2 percent above the 100- day average. Prices are set for the biggest annual loss since a 54 percent collapse in 2008.

U.S. Shale

Brent for January settlement, which expires today, was 25 cents lower at $60.81 a barrel on the London-based ICE Futures Europe exchange. The more-active February contract was down 35 cents at $60.86. The European benchmark crude traded at a premium of $5.10 to WTI, compared with $5.15 yesterday.

OPEC’s decision at a Nov. 27 meeting to maintain its production quota of 30 million barrels a day prompted speculation that it’s willing to let crude slide to a level that would slow U.S. output.

The 12-member group, led by Saudi Arabia, pumped 30.56 million a day in November, exceeding its target for a sixth straight month, according to a separate Bloomberg survey of companies, producers and analysts.

Hydraulic Fracturing

The U.S. oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which has unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota. While producers last week idled the most rigs in two years, that was almost entirely for vertical machines, not the horizontal drillers used for shale output, Goldman said in a report yesterday.

Production expanded to 9.12 million barrels a day through Dec. 5, data from the Energy Information Administration shows. That’s the highest rate in weekly records that started in January 1983.

Brent is poised to trade below half the level six months ago, according to the median estimate of 17 analysts surveyed yesterday. Prices need to drop further before producers will begin dealing with the global glut, said five out of six respondents who gave a reason.

In China, the preliminary PMI from HSBC Holdings Plc and Markit Economics was at 49.5, missing the median estimate of 49.8 in another Bloomberg survey and below last month’s 50.0. Readings of less than 50 indicate contraction.

The Asian nation is the world’s largest oil consumer after the U.S. and will account for about 11 percent of global demand next year, predicted the International Energy Agency in Paris.


Courtesy: Bloomberg