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Oil at $20 looks a lot more realistic

|By Arabian Post Staff| The prospects of $20 for a barrel of oil look a lot more realistic now than ever before as crude futures in the US dipped below $30 this week.

According to Bloomberg, crude futures in the U.S. sank into the $20s for the first time in more than 12 years on Tuesday, hours after BP said it would slash an additional 4,000 jobs, Petroleo Brasileiro SA cut its spending plan and Petroliam Nasional Bhd. warned that it faces several tough years.

Edward Morse, Head of Commodity Research, Citigroup had predicted a year ago that oil could fall “perhaps as low as the $20 range for a while.” Yesterday he said the world is now already confronting $20 oil.

“The $20 number is something you have to talk about,” Morse said. “When you’ve seen a $10 price slide and WTI is trading just slightly above $30, the likelihood is fairly great. Clearly oil markets cannot maintain a price at below the $30 level for very long. The question is how much longer.”

Goldman Sachs sees a 50 percent chance of oil falling to $20 in September while Morgan Stanley feels that a strong dollar could drop oil below $30.

West Texas Intermediate fell as low as $29.93 a barrel before settling at $30.44 Tuesday, the lowest since December 2003. It traded on Wednesday morning in London at $30.79.

Bloomberg quotes Mark Sadeghian, a senior director for the energy and commodities group at Fitch Ratings Ltd, to say that low prices could cause problems for U.S. oil companies with covenants that specify certain debt-to-earnings ratios or interest coverage, and will make it even harder for them to obtain financing to continue operating.

The Bloomberg Commodities Index fell to the lowest level since at least 1991 as demand from slowing emerging-market economies fails to keep pace with a flood of supply from investments made during the price boom of a half-decade ago.

Malaysia stands to lose 300 million ringgit ($68 million) for every $1-a-barrel decline in crude, according to government estimates. ConocoPhillips is losing $1.79 billion in net income each quarter for every $10 drop in prices, according to analysts at Barclays Plc.

Petrobras, as Brazil’s state-controlled oil producer is known, cut its five-year business plan to $98.4 billion, the latest adjustment to the original $130 billion announced last year.

The U.S. Energy Information Administration reduced its forecast for WTI prices for 2016 by 24 percent to $38.54 a barrel. In its monthly Short-Term Energy Outlook, the agency said the oil market would come back into balance in 2017.