Oil Could Sink Below $30 a Barrel
Concerns over the Chinese economy and continuing oversupply could push price lower
Once a minority view, oil below $30 a barrel is increasingly being touted as the new home for a crude price being battered by troubles in China.
Concerns over the Chinese economy, which is the world’s second-largest crude consumer, are combining with the continued fear of oversupply to potentially push the price of oil to below $30, a level that U.S. crude last hit in late 2003.
On Thursday, West Texas Intermediate, the U.S. benchmark, hit a low of $32.10 a barrel, while Brent, the global gauge, slid to $32.16 a barrel, its lowest since April 2004. Both benchmarks recovered later in the session but were still down around 7% for the week.
A fall below the landmark $30 level would send ripples from Riyadh to Houston as the embattled oil industry struggles to cope with a historic price rout. At the same time, consumers and business are seeing cheaper oil at the gas pump and in their heating bills.
Crude below $30 could come soon, and stay.
“It looks more likely than not that we will drop below $30, possibly as soon as next week,” said Chris Main, oil strategist at Citigroup Inc. “And with fundamentals looking pretty terrible, we could stay there for a couple of months.”
For some analysts oil could fall as low as $20 in the short term.
If oil closes below $36 a barrel this week, “it will point to a lower trading range for oil as low as $20 in the coming weeks,” said Marina Petroleka, head of energy research at BMI Research.
That view was seen as left-field just months ago, when Goldman Sachs sparked media headlines by predicting in September that crude could tumble to $20. Then, the investment bank was a rare outlier, and the average forecast of 12 investment banks polled by The Wall Street Journal was for $47 a barrel in the first quarter of this year.
The latest oil selloff came after the People’s Bank of China made its largest downward adjustment to the yuan since August, a move that sent the country’s stock market down over 7% on Thursday amid ongoing concerns about the economic health of the Asian giant.
China consumes around 12% of the world’s oil, second only to the U.S. In the past year, Chinese demand has held up as the government and local refiners took advantage of cheaper oil. More recently, a string of weak economic data has fueled fears about crude demand in the country.
“Demand won’t be coming to the rescue this time with China and the way the world economy is shaping up,” said Doug King, chief investment officer at RCMA Asset Management and manager of that firm’s $225 million Merchant Commodity hedge fund.
The latest China-inspired oil rout has soured the mood on trading floors.
“If the turmoil in China deepens, and with the glut not going anywhere, oil could fall in the late $20s, and soon,” said one London-based energy trader who declined to be named.
Concern over Chinese demand only adds to the host of factors that have pushed U.S. oil prices down around 70% from a peak of $107 a barrel just over a year- and-a-half ago.
The biggest factor in the decline has been oversupply. That came as U.S. oil flooded the market and the world’s largest exporter, Saudi Arabia, launched a price war to maintain its market share. There is currently around 2 million barrels of oil a day produced more than there is demand for, in an industry that pumps 96 million barrels a day, analysts say.
And there is even more oil coming.
Oil markets are preparing for hundreds of thousands of barrels of Iranian oil, after the nuclear deal struck between global powers and Tehran last year promised a lifting of some sanctions on the country.
To be sure, some analysts see the current lows as a temporary blip, arguing that the low prices will turn off the supply taps and usher in higher prices.
“Fundamentally, prices below $35 a barrel are hardly sustainable, unless global growth slows markedly,” said Norbert Rücker, head of commodities research at Julius Baer. “U.S. shale oil production is set to decline going forward, driving the much needed rebalancing of supply and demand.”
But while U.S. oil supply has tailed off from last year’s highs, other major producers, like Saudi Arabia and Russia, are so far ignoring the low prices to continue pumping crude at full tilt.
That has hurt the coffers of oil producing countries around the world, with Saudi Arabia announcing steep budget cuts last week and falling crude dragging national currencies down from Russia to Canada, whose dollar hit a multiyear low on Thursday.
It is also hitting investors’ portfolios as shares in energy companies plummet and the high-yield bond gets dragged down by oil and gas companies. Energy stocks in the S&P 500 have fallen 23% from this time last year, with shares in Royal Dutch Shell PLC down 33% since last January and Exxon Mobil Corp. down 15%.
A move below $30 would mean more pain for the oil patch. Oil and gas sector bankruptcies in the U.S. have reached quarterly levels last seen in the 2008 to 2009 recession, the Federal Reserve Bank of Dallas said in a December 28 report. At least 10 U.S. oil and gas companies, accounting for more than $2 billion in debt, have filed for bankruptcy in the fourth quarter of last year, the report said.
“Below $30, things really don’t work in the oil industry,” Citi’s Mr. Main said. “The further you go down, the more pain you are going to get.”