Think the oil price rout is over? Brace for US$35-a-barrel oil

LONDON (Bloomberg) - The U.S. benchmark crude price, down more than US$60 since June to below US$45 on Tuesday, is on the way to going below the next US$40 threshold, said Societe Generale and Bank of America.

"The markets are continuing to price in huge oversupply in the first half of 2015," said Mike Wittner, head of research at Societe Generale in New York on Monday. "We're going to go below US$40."

The rout may continue to US$35 a barrel in the "near term" because both oil supply and demand will have a delayed reaction to falling prices, Francisco Blanch, head of commodities research at Bank of America in New York, said in a report on Jan. 6.

WTI fell as low as US$44.20 a barrel on the New York Mercantile Exchange on Tuesday and traded at US$45.56 at 12:11 p.m. Singapore time on Wednesday. The U.S. benchmark has dropped 14 per cent this month, extending a 46 per cent plunge last year that was the worst since the 2008 financial crisis.

OPEC is trying to maintain its share of the global oil market against the rise of U.S. output. United Arab Energy Minister Suhail Al Mazrouei reiterated on Tuesday that shale producers will capitulate before OPEC to lower prices, the latest in more than a dozen comments from Gulf members aimed at hastening oil's slide and lowering non-OPEC supply. The group upheld its target of 30 million barrels a day at meeting in Vienna on Nov. 27.

The US is pumping oil at the fastest pace in more than three decades, helped by a drilling boom that's unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota. U.S. output expanded to 9.14 million barrels a day in the week ended Dec. 12, the most since at least 1983, according to the U.S. Energy Information Administration.

RWith Saudi Arabia and other OPEC nations no longer fine-tuning supply, reductions in investment in new production will be the instrument for removing excess output, Jeffrey Currie, head of commodities research in New York at Goldman said in a report on Jan. 11. This means the collapse will be deeper and the recovery slower than in previous slumps, he said.

Operating cash costs for many non-OPEC projects are below US$40 a barrel and some producers will be able to keep going because they have locked in forward prices, or are supported by tax breaks or weaker domestic currencies, said Blanch, who on Nov. 27 predicted that WTI, then above US$70 a barrel, could plunge to US$50. An increase in demand in response to lower prices will take about six months, he said.

While U.S. drilling activity has slowed down in response to the price plunge, it will take months for that to translate into lower supplies, according to Societe Generale's Wittner. Rigs seeking oil in the U.S. decreased by 61 to 1,421, Baker Hughes Inc. said Jan. 9. That's the largest drop since February 1991.

"Rig counts are coming down, so it is happening the way it's supposed to happen," Wittner said. "But it's going to take a while to see an impact on shale oil."

A seasonal lull in demand this quarter will add to the downward pressure from brimming inventories, pushing down prices as much as another US$10 a barrel, Amrita Sen, chief analyst at London-based consultant Energy Aspects Ltd. said in an interview on Bloomberg Radio's "Surveillance" on Jan. 12.

"There is likely to be another leg lower for prices," said Sen. "I wouldn't rule out a peek into the $30s."