As Wednesday hit, prior to rebounding, West Texas Intermediate futures, during a testing, came out at a low of $46.83 a barrel. This is a near 57% decrease from the $107.68 summertime high and is pointing in the direction of the depths that were seen last in the recession and financial crisis of 2008 that followed. There is a low $1.31 per barrel tested for wholesale gasoline futures.
In the past recent months, all angles have been covered for the energy price wipeout which includes the negative repercussions for corporate earnings, US economy and energy independence. There is now an increasingly turning focus on the damage and how bad it could possibly get.
Bank of America Merril Lynch new estimates pointed towards below $35 a barrel for the short-term floor. This is a drop that could indicate a near 30% decline from here with the market being a million oil barrels per day oversupplied. Option traders are beginning to set bets that there could be a drop in prices into the $20s in the following months.
It is obvious there is no quick reversal to come. There seems to be an earnest decision by OPEC to recapture the US market share of shale oil producers. Many of the oil exporting nations are stuck in what is called a prisoners’ dilemma; they yearn for higher prices but still feel the pinch in their national budgets. As far as Venezuela and Russia are concerned, their pain is strong and could end up leading to a total currency crisis. However, none of them wish to make any needed production cuts to balance out align supply with the undergoing economic demand which came about from economic weakness in Asia and Europe. Start trading oil with one of our top 10 binary options brokers.
With Japan slowly picking up pieces of its newest hike in sales tax, Europe stalling and China still trying to get a handle on its fixed asset investments and runaway housing without contributing to its bad debt issue, oil demand is hardly expected to absorb up any excess supply in the near future.
There is a component of negative self-reinforcement in the demand situation: Analysts of Bank of America Merril Lynch not that 50% of the growth of global oil demand of the last 10 years has been brought on from oil producing countries. This is an issue with the Middle East sucking into currency reserves and Russia pointing towards recession. Furthermore, it is assumed that any demand side response might come with a 6 month lag anyway.
Therefore, in order to find a price floor, there will need to be a cut in supply from areas that are outside of OPEC. According to the analysts, the large state owned oil producers are not a likely source since low cash production costs; price hedging, currency benefits and tax breaks have an impact on the price sensitivity of production. Currently, only the Kearl oil sands project of Canada is at risk with the price being close to $55 a barrel. However, its operator states there will be no shut down even in the event of a cash flow negative. The pre-salt fields of Brazil need around $23 to cover expenses.
This results in US shale producers having to carry the burden with the drying up of operating cash flows. However, with the occurrence of a natural gas flood a couple years back, also motivated by shale success, indicates that there will be a shifting of rigs by operators to more profitable fields prior to cutting output. This will result in US production cuts not occurring until the decline in newer investment, new rigs and new wells starting to flow in today’s production numbers. It will take time, however, it will happen.