Oil fell to the lowest level in more than 5 1/2 years after Goldman Sachs Group Inc. and Societe Generale SA reduced their price forecasts.
West Texas Intermediate decreased as much as 5.1 percent to $45.90 a barrel, and Brent 5.9 percent to $47.18. Crude has to “stay lower for longer” if investment in shale is to be curtailed to re-balance the global market, according to Goldman analysts. Prices need to return to $100 a barrel for economic equilibrium, Venezuelan President Nicolas Maduro said in Iran during a tour of Middle Eastern OPEC members.
“The price forecast cuts by both Goldman and Societe Generale reinforce the fears that have driven us down to these levels,” Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut, said by phone. “We’re hunting for a bottom, but it’s anyone’s guess where that will be.”
Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, amid a supply glut estimated by Qatar at 2 million barrels a day. The Organization of Petroleum Exporting Countries is battling a U.S. shale boom by resisting production cuts, signaling it’s prepared to let prices fall to a level that slows American output that’s surged to the highest level in more than three decades.
WTI Decline
WTI for February delivery declined $1.95, or 4 percent, to $46.41 a barrel at 11:09 a.m. on the New York Mercantile Exchange. It touched $45.90, the lowest level since April 21, 2009. Total volume was 42 percent above the 100-day average for the time of day.
Brent for February settlement dropped $2.63, or 5.3 percent, to $47.48 a barrel on the London-based ICE Futures Europe exchange. The contract reached $47.18, the least since March 2009. Volume for all futures traded was 53 percent higher than the 100-day average. The Brent-WTI spread dipped below $1 for the first time since July 2013.
“In a violent move like this it’s impossible to pick the magic number that’s the bottom,” Katherine Spector, a commodities strategist at CIBC World Markets Inc. in New York, said by phone. “I’m not going to pick a bottom. Prices will have to go to a level that inflicts maximum pain before the bottom is found.”
WTI will trade at $41 a barrel and Brent at $42 in three months, Goldman said in a report distributed Monday, citing excess U.S. storage capacity and predicting inventories will increase over the first half of this year. It also cut its price estimates for six and 12 months.
‘Stay Lower’
“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” said Goldman analysts including Jeffrey Currie in New York. “The search for a new equilibrium in oil markets continues.”
Societe Generale reduced its average WTI price for this year to $51 a barrel from $65 in a Jan. 9 report from Michael Wittner, the bank’s New York-based head of oil research. Brent will average $55 a barrel in 2015, down from a previous estimate of $70.
U.S. refineries have operated at over 90 percent of capacity for the last two months, according to the Energy Information Administration.
“The strongest pocket of demand is here, with refineries operating at near 94 percent of capacity,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “The Mexican request for U.S. exports is also reducing the spread. This a signal that more light, sweet barrels should be going that way.”
Export Ban
The 40-year old ban on most U.S. crude exports is set to be loosened after Mexico’s state-owned oil company asked for an exception. Petroleos Mexicanos said last week that it’s in talks with the U.S. Commerce Department to import 100,000 barrels a day of light crude to increase Mexico’s gasoline production and improve refining.
Rigs seeking oil in the U.S. fell by 61 to 1,421, Baker Hughes Inc. said Jan. 9, extending the five-week decline to 154. It was the largest drop since February 1991, which also followed a slide in prices before the start of the Persian Gulf War.
“This is a major change but we probably won’t see lower output this year,” Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, said by phone. “We won’t see the ramifications of this and the lessening of the glut until 2016.”
Output Target
OPEC decided to maintain its collective output target at 30 million barrels a day at a meeting on Nov. 27. It’s competing for market share amid surging output in the U.S., where production expanded to 9.14 million a day through Dec. 12, Energy Information Administration data show. That was the most in weekly records that started in January 1983.
The 12-member group needs to reach a consensus with other producers to “converge at a common strategy to benefit the oil market and stabilize the global economy,” Maduro said in comments broadcast on state television over the weekend.
Oil won’t return to $100 a barrel again, Saudi billionaire businessman Prince Alwaleed bin Talal said, according to USA Today.
“If supply stays where it is, and demand remains weak, you’d better believe it is going to go down more,” the newspaper reported him as saying.
Gasoline Futures
Gasoline futures fell 4.62 cents, or 3.5 percent, to $1.277 a gallon, after touching $1.2673, the lowest level since March 2009. Ultra low sulfur diesel slipped 4.84 cents, or 2.8 percent, to $1.6546. Diesel reached $1.651, the lowest level since July 2009.
Regular gasoline at U.S. pumps fell to the lowest level since May 2009. The average retail price slipped 0.9 cent to $2.13 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group. Pump prices were around $2.05 a gallon when oil was last below $50 a barrel.
Hedge funds and other large speculators raised bullish WTI bets by 7 to 199,395 contracts in the week ended Jan. 6, according to a Commodity Futures Trading Commission report on Jan. 9. Hedge funds bolstered bets Brent will increase by 24,598 contracts to 140,169 last week, data from ICE Futures Europe show.
“We are down more than $60 from last year’s highs and the market remains net-long which says to me that there’s more selling to go,” McGillian said. “Now that WTI is approaching $45 you have to go back to the 2009 lows in the low $30s before you find support.”