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Oil tumbles towards crisis-era lows

Financial Times, 14 December 2015
Oil slipped to a new seven-year low in Asian trading on Tuesday after a Monday drop that took it close to levels hit during the financial crisis amid increased expectations of persistent global oversupply. The renewed pressure on the oil price comes amid widespread expectations that the US Federal Reserve will on Wednesday raise rates for the first time in nearly a decade.

Cheaper energy costs are a boon for consumers and the broader economy. However, the prolonged slide in oil is hurting highly indebted US shale drillers and the banks that lend to them, with much of the junk bond energy sector currently in distress.

“The year is ending on an uncomfortable note. The smell of fear is back in the air,” said David Hufton at London-based broker PVM.

Bond markets showed fresh signs of anxiety on Monday, with a further sell-off for corporate debt. Depressed energy prices are just one factor focusing investors’ attention on companies’ ability to support their debts once borrowing costs rise.

In Asian trading on Tuesday, Brent crude was 0.2 per cent lower at $37.83 a barrel. On Monday the global benchmark touched a seven-year low of $36.33 but rebounded in afternoon trading to $38.20.
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West Texas Intermediate, the US market benchmark, slipped 0.1 per cent to $36.26 in Asian trading on Tuesday, after dropping on Monday to as low as $34.53, the lowest since February 2009, before recovering to $36.34.

Oil prices have tumbled since the meeting of Opec ministers at the start of the month. Brent has plunged as much as 17 per cent, while WTI is down 16 per cent.

Discord within the group on which members should make production cuts to shore up the price led to the continuation of Opec’s policy to keep on pumping.

In addition, the group scrapped its official production ceiling and took away any pretence of output constraint.

“The Opec meeting has removed any last hopes of a reprieve for oil and it has added another layer of downside sentiment to commodities in general. The dam has collapsed and prices are in freefall, with devastating consequences,” said Mr Hufton.

Despite weakening production growth outside Opec, members of the producers’ group have ramped up output in the face of lower oil prices.

Iraq and Saudi Arabia have pumped at record levels this year, while oil market participants are eyeing the appearance of additional barrels from Iran when sanctions linked to its nuclear programme are expected to be lifted next year.

“It seems the Iranians are fulfilling the requirements for the lifting of sanctions faster than expected,” said one London-based oil trader. “In addition, the Libyans are talking to one another about a ceasefire. If Libyan production can go back up, the price effect is almost unthinkable.”

The International Energy Agency, the leading energy forecaster, said oil stockpiles were expected to swell throughout next year, albeit at a slower pace than in 2015.

“Gloom is nourishing gloom on the oil market,” said Carsten Fritsch at Commerzbank. The sell-off has taken on “ludicrous dimensions”, he added.

A stronger dollar and money managers re-establishing their short positions were piling on the pressure, said Adam Longson, oil analyst at Morgan Stanley. “The outlook for prices appears grim,” he said.

Hedge funds continued to add to their record bearish positions last week, accumulating short positions in the main WTI and Brent futures and options contracts to the equivalent of more than 360m barrels.

The weakness in crude has spread to some oil products, hitting prices. Refineries that have been working hard to meet demand for petrol have also produced more diesel than is needed. A mild start to the winter has resulted in weak demand for heating oil.

The belief that above-average temperatures will last until the end of the year sent US natural gas prices to the lowest level since 2002 on Monday, dropping more than 6 per cent to a low of $1.862 per million British thermal units.