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Oil caps biggest yearly slump since 2008 amid supply glut

INTERNATIONA. Oil fell in 2014 by the most since the 2008 global financial crisis as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share amid a supply glut.

The U.S. benchmark ended at a five-year low yesterday, capping a 46 percent drop in 2014, as stockpiles of crude oil and gasoline reached seasonal record highs and as OPEC produced more than its quota in December for a seventh month. Goldman Sachs Group Inc. (GS) said it expects a “far lower” new normal for prices and Barclays Plc (BARC) said oil has “further downside risk.”

Oil’s slump has roiled currencies including the Russian ruble and the Nigerian naira and squeezed government budgets in producing nations including Venezuela and Ecuador. It’s also boosted China’s emergency crude reserves and helped shrink fuel subsidies in India and Indonesia. U.S. drivers may save as much as $75 billion at gasoline pumps in 2015, AAA said. Low prices have prompted producers including ConocoPhillips and Continental Resources Inc. (CLR) to plan spending cuts for 2015.

“The feature of the year is clearly the increase in production in North America,” said Michael Hiley, head of energy OTC at LPS Partners Inc. in New York. “It’s finally got to the tipping point where increases in production overwhelm demand. It’s having a very negative impact on the Russian economy as well as Iran, Venezuela. But clearly it’s a long-term good for the world economy.”

U.S. Condensate

West Texas Intermediate for February delivery dropped 85 cents, or 1.6 percent, to close at $53.27 a barrel yesterday on the New York Mercantile Exchange, the lowest settlement since May 2009. It peaked at $107.73 in intraday trading June 20.

Brent for February settlement fell 57 cents, or 1 percent, to $57.33 a barrel on the London-based ICE Futures Europe exchange, also the lowest since May 2009. Prices decreased 48 percent in 2014 and more than half from the 2014 peak of $115.71. The European benchmark crude ended at a premium of $4.06 to WTI, compared with $12.38 at the end of 2013.

U.S. crude stockpiles declined 1.75 million barrels in the week ended Dec. 26 to 385.5 million, the Energy Information Administration, the Energy Department’s statistical arm, said yesterday. Gasoline supplies gained 2.95 million to 229 million. Inventories at Cushing, Oklahoma, the delivery point for WTI futures, increased 2 million to 30.8 million, the most since February. Refiners produced 10.2 million barrels a day of gasoline last week, the most in EIA data going back to 1982.

Crude Production

Crude production accelerated to 9.14 million barrels a day through Dec. 12, the fastest rate in weekly data that started in January 1983, EIA data show. It was 9.12 million last week.

“The real story is the shale revolution and the fact that Saudi Arabia, the 500-pound gorilla, refuses to be the one to make the cut to support prices,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Everyone is fighting for market share here.”

OPEC, which pumps about 40 percent of the world’s oil, produced 30.24 million barrels a day in December, according to a Bloomberg survey, down from 30.36 million in November. The group decided to maintain its output quota at 30 million barrels a day at a Nov. 27 meeting in Vienna.

“In the near term, and by that I mean 30 to 60 days, crude will be under a lot of pressure,” Dan Heckman, Kansas City, Missouri-based national investment consultant at U.S. Bank Wealth Management, said by phone. His firm oversees about $120 billion. “It will take time to work off this inventory glut.”

Americans already saved $14 billion on the motor fuel in 2014, according to Heathrow, Florida-based AAA, the country’s largest motoring group. Pump prices have dropped to a national average $2.257 a gallon on Dec. 30, the lowest since May 2009, according to AAA.

President Barack Obama’s administration opened the door for expanded oil exports by clarifying that a lightly processed form of crude known as condensate can be sold outside the U.S. The guidelines released on Dec. 30 by the Commerce Department don’t end the ban on most crude exports, which Congress adopted in 1975 in response to the Arab oil embargo.

Yesterday’s “selloff is a fitting end to what’s been a difficult year for the oil industry,” Adam Wise, who helps run a $6 billion oil and gas bond portfolio as a managing director at John Hancock in Boston, said by phone. “We have excess supply.”

© 2015 Bloomberg

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