US oil falls below US$40 for first time in six years

The renewed drop in oil prices has sent energy stocks skidding, weighing on global market indexes, and unnerved investors. Puts give the holder the right, but not the obligation, to sell NYMEX crude futures at a predetermined strike price.

The U.S.is churning out oil at an unprecedented pace, adding to the supply from energy powerhouses such as Saudi Arabia and other OPEC countries.

The problems of falling oil prices are most acute for the government which relies on petroleum products for 75 per cent of its revenue. Probably not, says JPMorgan’s Brahim Razgallah, even though the ongoing pain in oil prices and Chana’s moves has brought the sustainability of the peg under scrutiny in a way it hasn’t been in years. A manufacturing gauge in China, the world’s second- largest oil consumer, sank to the lowest level since the financial crisis. A flip on the global market, where light oil tends to command a premium to heavy crude.

Sure, U.S. producers aren’t pumping as much oil as they were when Texas tea was fetching more than $100 a barrel, but they haven’t shut off the spigots as quickly as many had anticipated given the plunge in prices.

Given that WTIC crude briefly fell below the $40 mark in the 2008 panic, we can not rule out that it will do so again. The price of gasoline in the U.S. fell slightly to $2.65 a gallon, from $3.44 a year ago according to AAA, and there were stations in 12 states selling gasoline for less than $2. It touched $39.86 earlier. Most shale oil is profitable at $60 per barrel, and that proportion is rising rapidly as consolidation proceeds and efficiency rises. “In fact, in the 1999 case it took more than one round of cuts in order to fully rebalance the market”. Lower demand in western economies is bound to hit exports. SAGD is steam-assisted gravity drainage, a process to produce heavy oil sands. “Outsourcing U.S. refining capacity to countries with weaker environmental safeguards, for example, could result in additional air and water pollution in those countries and globally”.

In late 1985, oil prices slumped to $10 from around $30 over five months as OPEC raised output to regain market share following an increase in non-OPEC production. He said: “Oil would revert to the $50s range sooner rather than later”.

The week started with crude oil holding steady after previous week’s break. Analysts at Citi expect it to slide to close to $30 a barrel later this year.

Even so, the International Monetary Fund recommends that Saudi Arabia control its growing wage bill, make changes to government subsidies for fuel and electricity and bring in more non-oil revenue through taxes. While the supply side remains surplus, hopes of revival in demand in the immediate future remain distant in the absence of a strong and widespread indication of economic activities picking up in major economies.

The worldwide Energy Agency forecast last week that production would outpace consumption by 1.4 million barrels a day in the second half of the year and by 850,000 barrels a day in 2016. The current White House is in negotiations with Iran over a nuclear deal that also has oil and gas ramifications involved. Who knew about it a year ago?