Oil Set for Biggest Slump Since 2008 as OPEC Battles US Shale

Oil headed for the biggest annual decline since the 2008 global financial crisis as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share amid a supply glut.

The U.S. benchmark slid as much as 3 percent, bringing losses for 2014 to 46 percent. U.S. stockpiles of crude oil and gasoline were at their highest levels for this time of year, the Energy Information Administration said. U.S. guidelines allowing overseas sales of ultralight oil without government approval, announced yesterday, may “throw a monkey wrench” into Saudi Arabia’s plan to curb American output by giving U.S. producers another sales option, according to Citigroup Inc.

“The real story is the shale revolution and the fact that Saudi Arabia, the 500-pound gorilla, refuses to be the one to make the cut to support prices,” said Tariq Zahir, a New York- based commodity fund manager at Tyche Capital Advisors. “Everyone is fighting for market share here.”

West Texas Intermediate for February delivery dropped $1.25, or 2.3 percent, to $52.87 a barrel at 11:29 a.m. on the New York Mercantile Exchange after dropping to $52.51, the lowest since May 2009. Volume for all futures traded was 30 percent below the 100-day average.

U.S. Condensate

Brent for February settlement fell $1.25, or 2.2 percent, to $56.65 a barrel on the London-based ICE Futures Europe exchange after touching $55.81, also the lowest since May 2009. Prices have decreased 49 percent this year. The European benchmark crude traded at a premium of $3.78 to WTI on the ICE, compared with $12.38 at the end of last year.

“In the near term, and by that I mean 30 to 60 days, crude will be under a lot of pressure,” Dan Heckman, Kansas City, Missouri-based national investment consultant at U.S. Bank Wealth Management, said by phone. His firm oversees about $120 billion. “It will take time to work off this inventory glut.”

U.S. crude stockpiles declined 1.75 million barrels in the week ended Dec. 26 to 385.5 million, said the EIA, the Energy Department’s statistical arm. Analysts surveyed by Bloomberg expected an increase of 900,000 barrels. Gasoline supplies gained 2.95 million to 229 million. Distillates rose 1.87 million to 125.7 million.

Inventories at Cushing, Oklahoma, the delivery point for WTI futures, increased 2 million to 30.8 million, the most since February. The refinery utilization rate climbed to 94.4 percent. Refiners produced 10.2 million barrels a day of gasoline last week, the most in EIA data going back to 1982.

Roiling Markets

Oil’s slump has roiled markets from the Russian ruble to the Nigerian naira and squeezed government budgets in producing nations including Venezuela and Ecuador. It’s also boosted China’s emergency crude reserves and helped shrink fuel subsidies in India and Indonesia. OPEC has signaled it won’t cut supply to influence prices, instead preferring to defend market share amid an unprecedented U.S. shale boom.

Production accelerated to 9.14 million barrels a day through Dec. 12, the fastest rate in weekly data that started in January 1983, according to the Energy Information Administration. It was 9.12 million last week.

“You have weak demand and strong supply and it brings prices back down,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It’s the year that U.S. shale oil ascended to the throne. It’s interesting to see whether OPEC will continue to take no action.”

Condensate Exports

President Barack Obama’s administration opened the door for expanded oil exports by clarifying that a lightly processed form of crude known as condensate can be sold outside the U.S.

The guidelines by the Commerce Department’s Bureau of Industry and Security were the first public explanation of steps that companies can take to avoid violating export laws. It doesn’t end the ban on most crude exports, which Congress adopted in 1975 in response to the Arab oil embargo.

“This long-awaited move can open up the floodgates to substantial increases in exports by end-2015,” Citigroup analysts led by Ed Morse in New York said in an e-mailed report.

OPEC, which pumps about 40 percent of the world’s oil, decided to maintain its output quota at 30 million barrels a day at a Nov. 27 meeting in Vienna, ignoring calls for supply reductions to support the market.

“Today’s selloff is a fitting end to what’s been a difficult year for the oil industry,” Adam Wise, who helps run a $6 billion oil and gas bond portfolio as a managing director at John Hancock in Boston, said by phone. “The draw today doesn’t change the big picture. We have excess supply.”