As global crude oil production continues to outpace demand, crude oil prices continued a three-month decline into early October with four benchmark crudes hitting their lowest prices in 2014 between Sept. 30 and Oct. 8. Those four benchmarks have experienced declines of between 17 and 20 percent since their 2014 prices peaked in June and July. And if the global oil surplus continues, prices could continue to suffer.
As reported by both Bloomberg and Reuters, industry analysts attribute the glut to large output from the Organization of the Petroleum Exporting Counties, OPEC, along with production increases from non-OPEC countries such as Russia and increasing domestic production in the U.S., which recently reached a 30-year high.
Compounding the pricing issue is a softening oil demand in China and Europe as a result of a slowdown in economic growth. Also adding to the price issue was Saudi Arabia’s recent reduction in the selling price of its crude to Asian markets along with a cut in the price of its oil bound for the U.S. And the Wall Street Journal reports that other OPEC members, including Iran, Iraq, Libya and Venezuela, are also offering price discounts. OPEC meets in November and analysts are speculating about whether the cartel will cut production. Investing.com reports some analysts believe only a cut in OPEC production can reverse the downward trend in oil prices.
The changing landscape
According to Reuters reports, the global crude price dynamic is changing and oil shortages that were the primary influence on global oil prices over the last decade have disappeared. During that period, Reuters reports, OPEC had to struggle to keep up with demand and there was a fear that “peak oil” could be in sight. But after oil prices plummeted during the financial crisis, OPEC was forced to cut production. And with the increase in U.S. production from unconventional plays, Reuters said the “peak oil” scare faded.
What happens going forward is anybody’s guess at this point, but Reuters reports former Bush advisor Bob McNally as saying that OPEC members may wait on production cuts and let the U.S. cut production first. Some OPEC members believe the oil market will rebound from winter demand and that production cuts are not necessary.
However, if oil prices continue to slide and fall below $80 per barrel, Reuters cites a Baird Energy report saying that in the event of a “sustained pullback” to below $80 a barrel, U.S. drillers would probably curb activity. And Bloomberg quotes a Goldman Sachs analyst as saying that if WTI continues falling below $90, U.S. producers may shut down drill rigs.
Reuters reports McNally as saying that U.S. shale oil “is not just the newest and biggest source of supply,” but is also most responsive to oil prices. Reuters further quotes McNally saying that “North Dakota and Texas have effectively joined OPEC, though they may not have realized it yet.”
The hard numbers
For the first time since April 2013, West Texas Intermediate, WTI, the U.S. Midcontinent benchmark, fell below $90 per barrel settling at $89.74 for November delivery on the New York Mercantile Exchange on Oct. 3. WTI rebounded slightly rising back over $90 to $90.34 on Oct. 6, but then lost nearly $1.50 per barrel settling at $88.85 on Oct. 7, and it lost another $1.54 on Oct. 8 settling at $87.31. That price represents a decline of over 19 percent from WTI’s 2014 peak of $107.62 in July and a 21 percent decline over its 2013-14 high of $110.53 in September 2013. WTI’s 2013-14 low also came in April 2013 when it settled at $86.68, just slightly below its Oct. 8 closing price.
Brent North Sea, a European benchmark that heavily influences U.S. East Coast pricing, hit a 2013-14 low on Oct. 3 when it settled at $92.31, down nearly 20 percent from its 2014 high of $115.06 per barrel on June 19. Like WTI, Brent rebounded slightly on Oct. 6 to $92.90 but then fell again on Oct. 7 to $92.11, then a 2013-2014 low. But on Oct. 8, Brent fell again settling at $91.38, a new 2013-14 low. Brent’s 2013-14 peak price came in February 2013 when it reached $120.49.
According to Alaska Department of Revenue data available through Oct. 2, Alaska North Slope, a U.S. West Coast benchmark, hit its two-year low on Oct. 1 closing at $91.28, down more than 19 percent from its 2014 high of $113.17 in June and down more than 21 percent from its two-year high of $116.26 on the same day in February 2012 that Brent hit its two-year high.
And then there is North Dakota Light Sweet, NDLS. As Petroleum News Bakken has noted previously, the only source of publically available NDLS pricing is on the Flint Hills Resources market where it is priced for delivery to the Flint Hills Minnesota refinery. NDLS fell to its 2014 low of $73 on the Flint Hills market on Sept. 30, down from its 2014 peak of $92 which it hit on June 20. That represents a price decline of over 20 percent, the largest 2014 decline of the four benchmark crudes.
However, NDLS did rebound going into early October and went back up to $75.50 on Oct. 2, but then softened along with the other benchmarks settling at $73.25 on Oct. 7 and $71.75 on Oct. 8. NDTL hit its 2013-14 peak of $99 in July 2013, and its two-year low came in December 2013 when it closed at $69.25.
Bakken crude oil is also priced at Clearbrook, Minnesota, where it typically trades higher than on the Flint Hills market, but those price data, which are tracked by Bloomberg, are not available to the public.
Louisiana Light Sweet, a Gulf Coast benchmark which has recently been trading near par with Brent, settled at $96.29 on Oct. 2, but by Oct. 8 it had fallen nearly $6 settling at $90.58 according to CME Group information provided by Argus. Western Canadian Select, another North American benchmark, settled at $77.86 on Oct. 2, but by Oct. 8 it too had fallen settling at $74.46.
