Oil Falls to 5 1/2-Year Low as Goldman Cuts Price Outlook

Oil dropped 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 4.7 percent to $46.07 a barrel, and Brent 5.3 percent to $47.43. 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. Societe Generale said falling prices may force the shutdown of expensive crude operations in Canada and the U.S.

“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.”

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 $2.29 to $46.07 a barrel on the New York Mercantile Exchange. It was the lowest settlement since April 20, 2009. Total volume was 34 percent above the 100-day average at 3:04 p.m.

Brent for February settlement dropped $2.68 to end the session at $47.43 a barrel on the London-based ICE Futures Europe exchange. It’s the lowest close since March 16, 2009. Volume for all futures traded was 57 percent higher than the 100-day average.

“It’s hard to see what will end the move lower given how bearish sentiment is,” Michael Wittner, head of oil research at Societe Generale in New York, said by phone. “The very weak fundamentals are still being priced in.”

WTI will trade at $41 a barrel and Brent at $42 in three months, Goldman said in a report distributed today, 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, Wittner wrote in a Jan. 9 report. Brent will average $55 a barrel in 2015, down from a previous estimate of $70.

“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.”

Refinery Activity

The Brent-WTI spread closed at $1.36, the least since July 2013 as the demand outlook for U.S. crude surpassed that for barrels elsewhere. 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 is a signal that more light, sweet barrels should be going that way.”

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.

‘Major Change’

“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.”

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.

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 4.87 cents, or 3.7 percent, to $1.2745 a gallon, the lowest settlement since March 11, 2009. Ultra low sulfur diesel slipped 4.89 cents, or 2.9 percent, to $1.6541, the lowest close since July 17, 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, a Commodity Futures Trading Commission report on Jan. 9 showed. Hedge funds boosted 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.”

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