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Oil markets seeing red as crude price keeps falling

Oil markets had little to celebrate over the New Year as the crude price meltdown continued. Brent was trading at $48.46 per barrel (/b) and WTI at $46.39/b as Petroleum Economist goes to press.

Saudi Arabia has stuck steadfastly to its pledge not to cut production to stem the price decline, leaving the market in unfamiliar territory. Oil minister Ali Al-Naimi even mused in an interview that oil prices might never return to $100/b.

With Saudi staying on the sidelines, most analysts are now closely parsing US oil supply data for signs of an imminent production slowdown. There are no indications of that as yet, leaving the market guessing where the price floor will be.

The emerging consensus coming from analysts is that prices will continue to fall through the first half of the year, triggering a supply reduction from the US. The price bounce-back, when and if it comes, should start in the second half of the year.

However, there is disagreement over how far prices will fall. Deutsche Bank, for one, reckons prices might have to fall to $30/b before US shale production starts to slow. There is also disagreement over whether the recovery will be U-shaped, with prices remaining depressed for a period before rising slowly, or V-shaped, in which prices rise sharply on a supply imbalance.  

A surprising development during the price rout has been the rapid convergence of Brent and WTI prices. Since 2010, Brent has typically traded at a sizable premium to WTI. But the spread between the two most prominent price benchmarks has narrowed. WTI even briefly traded at a premium to Brent on 13 January.

Europe’s continued economic woes have weighed on Brent. At the same time, the Obama administration has been sending signals to the market that it may allow more oil exports, which has buoyed WTI. 

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