Oil plumbs new depths below $55 a barrel

Oil prices have continued their descent in the new year, with US$50 a barrel the next milestone coming into view on the way down.

In Dubai on Monday, crude oil futures for February delivery lost another $1.97 a barrel to finish at $52.04. In London, North Sea Brent crude futures were down $1.82 at 5pm UAE time to $54.60, bringing the cumulative loss since last summer’s high to more than 52 per cent.

The dip below $55 was the first since May 2009.

Oil prices have declined every week since mid-November when the decline that began last June gathered pace as it became clear that Opec, and Saudi Arabia in particular, would rather see prices fall than cede market share by cutting production.

Brent was last below $50 a barrel briefly at the end of 2008, when oil prices crashed in the wake of the global financial crisis. But it has not been below that level for a sustained period since 2005.

Citibank this week added its voice to the chorus of those cutting their forecasts for Brent crude this year, with a bearish new prediction that Brent will average $63 a barrel in 2015.

Ed Morse, the head of commodities research at Citigroup and one of the more authoritative analysts after accurately bucking the consensus view in the recent past, laid out a very bearish case for the oil market in his latest report.

Mr Morse reiterated the story that the oil market has become swamped by output from North America, from both Canada’s vast Alberta tar sands fields as well as those opened up by new drilling technologies in places such as North Dakota and the Permian Basin in Texas.

He sees these conditions gathering pace in the early part of this year.

“Lying ahead in [the first half of 2015] is a step-up in oversupply, more volatility and turmoil, with a surge of more than 200,000 barrels a day in Canadian sour crude delivered to the US [Gulf Coast], along with potential Saudi efforts to regain US market share followed by weaker [second quarter 2015] demand and what looks to be weaker refinery margins.”

Like others, Mr Morse is also worried about the wider implications of the sudden and sharp drop in oil prices.

"Most worrisome are unintended consequences and geopolitical fallout," he warns. "Opec's expected revenues of $445 billion this year, down more than 50 per cent from 2012, increases domestic pressures in Opec and other producers, especially those facing sanctions and internal dissent such as Russia and Iran, where geopolitical tensions could strain further if prices are seen as being manipulated against them."

Recent predictions for oil prices from banks and other forecasters have varied wildly.

HSBC, for example, is still forecasting a Brent average price of $95 a barrel for this year, expecting that the sharp decline in prices will cut off investment for the more expensive projects. Morgan Stanley, on the other hand, is among the more downbeat, seeing Brent going as low as $43 a barrel, though more likely to average out at $70 a barrel.

In such volatile conditions, predictions are even more flexible than normal. Even Citigroup reaffirmed a forecast for this year of $97.50 a barrel for Brent as recently as October.

One of the difficulties is assessing the impact of lower prices on producers. Russia and other former Soviet Union producers were pumping at a record rate in November and December. But while exports from that region likely will continue to surge this month, they may be hit by a number of factors as the year progresses.

"Output [from Russia] this year could decline year-on-year by over 100,000 barrels a day, given the impact of sanctions, low [oil] prices and no large projects expected to come online," according to Amrita Sen, the head of oil analysis at Energy Aspects.

Several of the large international oil companies also have announced lower capital expenditures in the coming year, including ConocoPhillips, which last month said it would cut overall investment by 20 per cent, a significant portion of which would be in unconventional plays in the Permian Basin, Niobrara in Colorado and the Montney and Duvernay tar sands projects in Canada.

The question for the oil markets is how long it will take for cutbacks such as these to take effect and allow oil demand in a sluggish world economy to catch up with supply.

Mr Morse reckoned the market will find a new equilibrium but not quickly.

“There are likely to be lots of head fakes, starting with reports of declining production in North Dakota,” he said. “But this is going to reflect far less the accumulating reductions in upstream capital spending than normal seasonality and the difficulties of drilling in the heart of winter in snowy and icy North Dakota. Even so, the market should eventually sort itself out, from a combination of supply and demand responses.”

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