Crude Oil Falls Sharply to 12-yr low on China, Stocks
Crude oil fell sharply on January 6th, with the US benchmark, West Texas Intermediate, closing down $2.00/barrel at $33.97/b and the Dated Brent contract losing even more, $2.19/b, to close at $34.23/b.
The news backs up the views of the bears in the market who have been talking about “lower for longer” and will have repercussions for oil and gas production unless prices pick up sharply soon. More upstream projects will be deferred as companies look at ways to save money. And the cash-and-shares Shell-BG merger, now only needing the shareholders' approval, requires a much higher oil price for it to break even. And more pressingly, existing gas sales contracts that are priced off crude oil -- such as most of the LNG sold to Asia -- have the potential to drift even lower.
According to the Financial Times, this was the lowest close for Brent since 2004, and compares with a price of almost $39/b on January 4th, after a Saudi court carried out the death sentence on an Iranian cleric. That fear of escalating tensions gave way to the fear of yet more oil coming to a market that already has some 2 million barrels/day more than it can consume, the FT said.
Relations between the two countries were bad enough before, in the oil sector. Iran had been keen to see Saudi Arabia rein in its oil output to keep prices up but at last December’s OPEC meeting, it took no such decision. It is possible that large volumes of Iranian crude will reach the markets in the coming months, hence Iran's hope for some kind of discipline in the cartel. And last December the US paved the way for its own crude exports to begin, ending a 40-year ban.
The weakness of China’s currency, now at its lowest level in nearly five years, has put investors on notice that the Chinese economy, a key engine of global growth, may be slowing at a faster pace than previously forecast, the FT said, adding that UK finance minister, George Osborne would use a speech later on Thursday to warn that Brazil and Russia also had grave economic problems and that "creeping complacency" about the UK economy was to be avoided.
Analyst Malcolm Graham-Wood said in his blog on January 7th: “worries from China were leading the fall and with the devaluing yuan, traders sense a currency war into the bargain." He said the build in gasoline and distillate stocks "worried the market.”
William Powell