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Wednesday, April 21, 2021

Investors take heed when oil hits $30 a barrel

The seemingly unending plunge of oil prices continued Tuesday – with U.S. benchmark West Texas Intermediate crude briefly dropping below $30 per barrel and Brent crude, the global benchmark, falling as low as $30.34 before settling at $30.86.

For comparison, WTI closed at over $38 on the day before Christmas – and Brent was at similar levels. Brent has now fallen from a recent peak of over $114 in June 2014.

The declines aren’t as steep as on prior days this year, but what’s significant is the new move toward $30 per barrel oil – with WTI crude breaking briefly below $30 at $29.93 before closing at $30.44 on the New York Mercantile Exchange. That represents a key psychological level for investors, said Peter Pulikkan, an energy analyst for Bloomberg Intelligence, one that would cause traders to “reassess their perceptions of the oil market.”

“The market has been readjusting to the notion of ‘lower for longer,’ that was kind of the mantra of the oil space for 2015,” Pulikkan said. “And as we enter 2016, the mantra has changed, the new mantra is ‘even lower, for even longer.’ “

The deep causes and explanations for what’s happening in the market haven’t changed – there’s too much oil supply available, and production declines still haven’t been large enough to undermine the glut of cheap oil. The most immediate catalyst for price declines may be concerns about declining demand in China, but the fundamentals of supply and demand are ultimately what’s behind the incredible downward ride of oil prices since 2014.

“The starting point is the oversupply in the world market and the battle for market share among the exporters,” said Daniel Yergin, an energy expert and the vice chairman of IHS. “But the oil price is also being pounded down by the geopolitical rivalry between Saudi Arabia and Iran in the Middle East, and the imminent return of Iranian oil under the nuclear agreement, and at the same time, by the increasingly big worries about the Chinese economy.

“If you went back eight years, this would have been inconceivable,” said Yergin, who added that the growth of the U.S. shale oil industry has been another factor that has changed the game for oil.

In its short-term energy outlook released Tuesday, the U.S. Energy Information Administration forecast that eventually this will pass, at least a little. It suggested that Brent prices will average $40 this year, climbing to $50 in 2017, with WTI crude slightly lower. The agency noted, however, that there is “high uncertainty in the price outlook.”

Analysts continue to think that as low prices persist, this will prompt changes in production and industry practices that, eventually, lessen the supply glut. The $30 price point could be a key part of that process, said Sean Heinroth, a principal in the energy practice at A.T. Kearney, a global management consulting firm.

“Each time oil hits a new benchmark low, oil companies start to look at their operations a little bit differently,” Heinroth said.

Continuing declines in oil prices are leading to very cheap gasoline – a gallon cost $1.956 on average across the United States on Tuesday, AAA reported. The EIA forecasts that gas will average $2.03 this year. “Inflation adjusted, you can make an argument that gasoline prices are at an all-time low,” says Bloomberg’s Pulikkan.

But what’s good for U.S. drivers and consumers is also causing convulsions in the oil industry, as indicated by layoffs and declining U.S. rig counts, which are down more than 1,000 in comparison with last year, according to Baker Hughes oil services company.

On Tuesday, BP announced plans for 4,000 job cuts, with one company representative citing “toughening market conditions.”

Internationally, oil-dependent countries have seen severe budget challenges, and continuing price declines have prompted calls for an emergency meeting of OPEC members to reconsider the policy of keeping production steady.

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