It's funny reading these stories of oil prices reaching lows for the first time in 6 years, when identified that there was no such thing as peak oil over 5 years ago. Aivars Lode
Prices slide as yuan devaluation sparks fears of a slowdown in Chinese demand
By Georgi Kantchev and Timothy Puko
U.S. oil fell to a six-year low Tuesday, pummeled by China’s plummeting currency and a growing conviction that global demand can’t catch up with an unrelenting supply of crude.
Oil, in tumult for more than a year, continued a summer swoon that took it below the lows it plumbed this spring. Production is still near historic highs in both the U.S. and the Organization of the Petroleum Exporting Countries, new data show. It indicates suppliers around the world are still mired in a fight for customers that ramped up output and took down prices nearly 60% from the highs of 2014.
The latest blow came from China, which devalued its tightly controlled currency Tuesday, spreading pessimism among investors about China’s economy and the possibility of a currency war. The yuan registered its biggest one-day loss in two decades following the central bank’s decision.
Congress may lift a ban on oil exports in September which could impact the economy and global oil market as oil futures continue to look bleak. WSJ’s Nicole Friedman joins Lunch Break. Photo: Getty
The plunge should make China’s imports of dollar-priced commodities such as oil more expensive, a discouraging sign for demand for the world’s second-biggest petroleum consumer, analysts said. It could also send the dollar rallying, a factor that has repeatedly pushed crude prices lower.
It “suggests that the Chinese economy is still struggling to move out of its slowing pattern and into a growth spurt,” Dominick Chirichella, analyst at the Energy Management Institute, said in a note. “Overall it continues to suggest that the main oil growth engine of the world is not going to come to the rescue of the oversupplied global oil market anytime soon.”
Light, sweet crude for September delivery fell $1.88, or 4.2%, to settle at $43.08 a barrel on the New York Mercantile Exchange. It was the largest one-day percentage loss in more than a month and sent U.S. oil to its lowest settlement since March 11, 2009, when the U.S. economy was still reeling from the financial crisis.
Brent crude, the global benchmark, fell $1.23, or 2.4%, to $49.18 a barrel on ICE Futures Europe. It is within $3 of its six-year low set in January.
The U.S. Energy Information Administration on Tuesday lowered its price forecast for both U.S. and global spot prices by about 10%. It forecast U.S. crude at $49.62 a barrel for 2015 and Brent at $54.40.
It cut its U.S. production expectations by 1.2% to 9.4 million barrels a day, but also said U.S. production is still on track to be the highest since 1972. It increased its forecast for OPEC production by 0.5% to 37.3 million barrels a day, which cancels out those U.S. cuts and is likely to keep the world market oversupplied by more than two million barrels a day for 2015.
OPEC is responsible for more than a third of world’s oil supply, and had said earlier Tuesday that its members raised their collective output in July to the highest level in three years. OPEC’s output increased by 101,000 barrels a day to 31.5 million barrels a day last month, the oil cartel said in its monthly report.
High oil output from the U.S. and some of the world’s biggest petroleum producers, coupled with concerns about an economic slowdown in China, have hit investor sentiment in recent weeks. Oil prices plunged into a bear market last month and are off more than 50% from last year. As major global suppliers such as Saudi Arabia and Russia have pumped crude at a record pace—and with Iran likely seeing a ban on its exports ending soon—there are few signs that the global oversupply of oil will abate in the near future.
An oil tanker passes a fisherman as it enters a channel near Port Aransas, Texas, in July.The price of oil slid as the decision to devalue the Chinese currency would make China’s imports of dollar-priced commodities like oil more expensive. Photo: Associated Press
Investors believe U.S. producers can sustain their near-record pace and global exporters also will be pushing to mitigate any declines, analysts at Credit Suisse Group AG said Tuesday. Those investors appear to have lost confidence that demand growth can keep up and have been selling off long-dated futures, leading to the recent steep decline in front-month prices, Credit Suisse said.
“That is a warning flag—a death canary if you want to go that route,” Jan Stuart, the bank’s global energy economist, said in a conference call.
Meanwhile, the U.S. Energy Information Administration is set Wednesday to release a weekly report detailing U.S. oil supplies. Analysts surveyed by The Wall Street Journal expect the report to show that crude-oil supplies fell by 2.1 million barrels last week. Analysts also expect the EIA to report that gasoline supplies fell and stocks of distillates, including heating oil and diesel fuel, rose.
The American Petroleum Institute, an industry group, said late Tuesday that its own data for the same week showed a drawdown of just 847,000 barrels in crude-oil supplies, according to sources. The group said that gasoline supplies rose by 117,000 barrels, a source said. API said U.S. distillate stocks increased by 2.16 million barrels in the week, according to the source.
“U.S. production remains near the highest level in four decades, although the commodity price is telling the U.S. shale sector to shrink, “ OPEC said in its report. The higher output is largely due to increased cost efficiencies, lower taxes and existing projects coming on stream, it added. The group said that, for example, in North Dakota, many projects can still be profitable at $24 to $41 a barrel.
OPEC forecasts U.S. output to rise this year by nearly a million barrels a day and another 320,000 barrels a day in 2016.
While many are concerned Tuesday about whether global demand can keep up, the technical aspects of how currencies affect oil prices are likely an even bigger factor in oil’s slide, said Hamza Khan, head of commodity strategy at ING Bank in Amsterdam.
The dollar’s rise in the past year has played a big role in oil’s concurrent decline because oil is priced in dollars and becomes more expensive for holders of other currencies as the dollar appreciates. Oil usually goes down when the dollar goes up. The Wall Street Journal’s dollar index recently traded up 0.4% on the day.
“People are thinking that China’s currency [decision] could open a currency war, which could make the dollar even stronger,” Mr. Khan said.
Gasoline futures settled down 0.03 cent, or 0.02%, at $1.6937 a gallon. Diesel futures settled down 2.92 cents, or 1.8%, to $1.5629 a gallon.
—Benoît Faucon contributed to this article.