Alex Mills
By Alex Mills
Crude oil posted prices in Texas dropped below $40 per barrel for the first time in six years last week, indicating that the market probably has not yet bottomed out.
Petroleum economist Karr Ingham noted that “for the first time in the current contraction the daily posted price for West Texas Intermediate crude oil dipped below $40.00 to $39.75 on Tuesday, August 11.”
Ingham noted that the below-$40 price is the price posted to be paid at the lease level in Texas for WTI and not the futures price for barrels traded on the New York Mercantile Exchange.
“The daily posted price fell to $40.00 on March 17, 2015, before recovering to $58.00 on June 10,” Ingham said. “The last time the daily posted WTI price was below $40 was on March 11, 2009.” He noted that the futures price closed at $43.08 on Aug. 12.
Prices did not rebound during the week. According to the posted prices posted on the web page of the Texas Alliance of Energy Producers crude oil posted prices ranged from a high of $40.58 paid by Shell in West Central Texas to a low of $33.50 paid by Sunoco in South Texas. The Plains Marketing, L.P. daily posted price for WTI crude fell yet further to $38.75 on Thursday.
Ingham said that the Chinese decision to devalue their currency was in large part the impetus for the sharp move downward on Tuesday, but the price was going to decline by some measure again regardless. The $40 threshold was going to be broken soon based on highly bearish fundamentals, he said.
Other factors pointing to even further declines are:
- Slack demand based on economic stagnation in many areas, including Greece, Russia, Europe, and China.
- Increased production when sanctions are lifted against Iran.
- OPEC continues to produce oil in excess of its stated quota.
- Continued over supply of oil in the U.S.
It was the latest blow for oil prices, which have been in a 14-month tailspin.
The US oil benchmark has now fallen more than 31 percent since topping out this year in early June and is down more than 60 percent since June of last year.
The EIA reported recently that Iran could begin selling as much as 100,000 barrels per day from storage before the end of the year. That came one day after the International Energy Agency said Iraq oil production rose to an all-time record of 4.2 million bpd in July, adding to global supplies.
OPEC produced the most crude oil last month in more than 3 years as Iran restored output to the highest level since international sanctions were strengthened in 2012. OPEC, responsible for 40 percent of world oil supplies, raised output by 100,700 barrels per day to 31.5 million barrels per day in July.
The currency devaluation could hurt demand in the world’s second-biggest petroleum consumer at a time when oil prices are trading near their lowest levels for the year. It suggests that the Chinese economy is still struggling to move out of its slowing pattern. It continues to suggest that the main oil demand growth engine of the world is not going to come to the rescue of the oversupplied global oil market.
In the absence of a solution to the over-supply issue on the demand side of the equation, the market may well have to force a reduction in production/supply by pushing prices lower, said Ingham.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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