Oil Drops to 5-Year Low on Concern Supply Glut to Worsen
Crude oil dropped to the lowest level in more than five years Dec. 18 on concern a supply glut will worsen.
Trading volatility for both Brent and West Texas Intermediate increased to a four-year high. Saudi Arabia, the largest producer in OPEC, will stick to its policy to maintain output, Oil Minister Ali Al-Naimi said.
The Organization of Petroleum Exporting Countries last month refused to cut production at a meeting in Vienna. Prices rallied earlier on speculation recent losses were excessive.
On close examination, a lot of Naimis comments are quite negative, said Gareth Lewis-Davies, a London-based analyst at BNP Paribas SA. He is unwilling to change his position. Its too early to call a bottom.
WTI for January delivery fell $2.36, or 4.2%, to $54.11 a barrel on the New York Mercantile Exchange, the lowest settlement level since May 2009. Prices jumped as much as 4% earlier. The more-active February future was down $2.43 at $54.36. Total volume was about 40 % above the 100-day average for the time of day.
Brent for February settlement declined $1.91, or 3.1%, to $59.27 a barrel on the London-based ICE Futures Europe exchange with volume 11 % above the 100-day average. Thats also the lowest close since May 2009. The European benchmark crude traded at a premium of $4.91 to WTI for the same month.
Implied volatility for at-the-money options in the front-month Brent contract, a measure of expected futures movements and a key gauge of options value, rose to 47.3% Dec. 18, the highest level since October 2011, according to data compiled by Bloomberg News. WTI volatility is also at the highest since 2011.
There is a lot of volatility here, said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. I dont think anyone is really buying this market with any sort of significant conviction.
WTI and Brent have slumped about 45% from this years peaks in June as a surge in shale drilling lifted U.S. output to the fastest pace in three decades amid slowing growth in world demand.
Members of the Organization of Petroleum Exporting Countries including Saudi Arabia, the worlds largest exporter, have resisted calls from producers such as Venezuela and Ecuador to reduce output to stem the price drop.
At the end of the day, there is still a lot of oil out there, said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. The so-called comeback is pretty anemic. We should continue to see supply basically outpacing demand.
Saudi Arabia and OPEC would find it difficult, if not impossible to give up market share by cutting crude production, Al-Naimi said, according to comments published today by the Saudi Press Agency. Global oil markets are experiencing temporary instability caused mainly by a slowdown in the world economy, he said.
Its the effective end of OPEC, Francisco Blanch, head of global commodities and derivatives research for Bank of America, said on Bloomberg TV yesterday. Basically Saudi has pulled the plug and is letting the market balance itself. If the price of oil doesnt have a moderating agent, its going to be all over the place.
The Russian economy must adapt to the reality of oil prices that could fall as low as $40 a barrel, President Vladimir Putin said as he faces the worst financial crisis since coming to power in 2000.
I dont know how quickly it will happen if prices stay at todays level, or if they will drop lower than $60, $40, Putin said today at his annual press conference in Moscow. The economy will structure itself accordingly, however much is necessary.
Crude output from Russia, the worlds largest crude producer, will be similar to this years 10.6 million barrels a day in 2015, Energy Minister Alexander Novak told reporters yesterday at a meeting of the Gas Exporting Countries Forum in Doha, the Qatari capital.
U.S. drivers are paying less than $2.50 a gallon at the pump for the first time in more than five years. Retail gasoline prices slipped to an average $2.477 a gallon last night, data from the Heathrow, Florida-based motoring group AAA showed. Thats down from this years peak of $3.696 in April, and the first time the average has dipped below $2.50 since October 2009.
