OPEC stands firm despite sub $50 crude

January 9, 2015 09:36 AM

Oil headed for a seventh weekly decline in New York and London amid speculation that OPEC won’t pare output to reduce a global surplus.

West Texas Intermediate fell as much as 1% as the dollar pared losses after better-than-forecast U.S. employment data. The United Arab Emirates has no plans to reduce output no matter how low prices drop, Yousef Al Otaiba, the nation’s ambassador to the U.S., said yesterday. Representatives from Saudi Arabia, Kuwait and the U.A.E. stressed a dozen times in the past six weeks that OPEC won’t curb output. WTI’s discount to Brent shrank to its narrowest since October.

“So far, there is no indication that OPEC will waver from its decision made at the meeting last year to maintain production,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London, said by e-mail.

Oil is trading near the lowest levels since April 2009 amid concern that a global supply surplus estimated by Qatar at 2 million barrels a day will persist this year. The Organization of Petroleum Exporting Countries is battling a U.S. shale boom by resisting production cuts, signaling it’s prepared to let prices fall to a level that slows the highest American output in more than three decades.

 

Erases Gain

West Texas Intermediate for February delivery slipped 37 cents to $48.42 a barrel in electronic trading on the New York Mercantile Exchange as of 1:46 p.m. London time, having climbed as much as 82 cents to $49.61 a barrel. The volume of all futures traded was 8.3% above the 100-day average for the time of day. Prices are down 8.2% this week.

Brent for February settlement decreased as much as 96 cents, or 1.9%, to $50 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude’s premium to WTI shrank to as little as $1.63, the least since Oct. 16.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, fell 0.2% to 1,145.09 as of 8:34 a.m. in New York after dropping as much as 0.4%. The addition of 252,000 jobs followed a 353,000 rise the prior month that was more than previously estimated, a Labor Department report showed today in Washington.

U.S. output expanded to 9.14 million barrels a day through Dec. 12, according to the Energy Information Administration. That’s the highest level in weekly data from the Energy Department’s statistical arm that started in January 1983.

 

Lot Longer

The U.A.E. can live with current market conditions for “a lot longer than people expect,” Al Otaiba, the ambassador, said in Washington yesterday. “This extra glut in the market is not coming from the OPEC members, so therefore why should the OPEC members have to cut their production?”

OPEC’s 12 members, which supply about 40% of the world’s oil, agreed on Nov. 27 to maintain their collective output quota at 30 million barrels a day. The group produced 30.2 million barrels a day of crude last month, according to data compiled by Bloomberg. They’re next scheduled to meet on June 5.

U.S. producers are bailing out of long-term contracts for drilling rigs as prices slide below $50 a barrel. Helmerich & Payne Inc., the biggest rig operator in the U.S., said it had received early termination notices for four contracts, while Pioneer Energy Services Corp. said four rigs have been canceled early.

Producers may cut short another 50 to 60 agreements, according to Andrew Cosgrove, an analyst at Bloomberg Intelligence.

 

Reconsider Investments

“Some U.S. producers may need to reconsider their investments because oil prices have now halved,” Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo, said by phone today. “But it’s unclear if the declines are over.”

Implied volatility for at-the-money options in the front- month WTI contract advanced to 60.2% this week, the highest level in more than three years, data compiled by Bloomberg show. It’s about 46% today, while Brent’s volatility is near 44%.

WTI may fall next week, according to a Bloomberg News survey. Twenty-two of 43 traders and analysts, or 51%, said futures will decrease through Jan. 16, while 11 respondents predicted a gain. The survey has correctly predicted the direction of futures 51% of time the since it began in April 2004.

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