US$20 oil no longer mirage as crude sinks below US$30

Pumping jacks, stand silhouetted against the sun at an oil plant in Damborice, Czech Republic.
Pumping jacks, stand silhouetted against the sun at an oil plant in Damborice, Czech Republic.PHOTO: BLOOMBERG

HOUSTON (BLOOMBERG) - The world mostly ignored Mr Ed Morse 11 months ago when the head of commodities research at Citigroup said oil could drop to as low as US$20.

It's paying attention now that crude has tipped below US$30.

BP slashed 4,000 jobs, Petroleo Brasileiro slashed its spending plan and Petroliam Nasional Bhd (Petronas) warned that it faces several tough years before crude futures in the US sank into the US$20s for the first time in more than 12 years.

Mr Morse, who wrote in a Feb 9 research note that oil could fall "perhaps as low as the US$20 range for a while", said on Tuesday in Calgary that the world is now "confronting US$20 oil".

"The US$20 number is something you have to talk about," Mr Morse said. "When you've seen a US$10 price slide and WTI is trading just slightly above US$30, the likelihood is fairly great. Clearly oil markets cannot maintain a price at below the US$30 level for very long. The question is how much longer."

West Texas Intermediate fell as low as US$29.93 a barrel before settling at US$30.44 on Tuesday, the lowest level since December 2003.

Low oil prices could cause problems for US oil companies with debt covenants that specify certain debt-to-earnings ratios or interest coverage, and will make it even harder for those companies to obtain financing to continue to operate, said Mr Mark Sadeghian, a senior director for the energy and commodities group at Fitch Ratings.

The Bloomberg Commodities Index fell to the lowest level since at least 1991 as demand from slowing emerging-market economies fails to keep pace with a flood of supply from investments made during the price boom of a half-decade ago.

Malaysia stands to lose RM300 million (S$98.1 million) for every US$1-a-barrel decline in crude, according to government estimates. ConocoPhillips is losing US$1.79 billion in net income each quarter for every US$10 drop in prices, according to analysts at Barclays Plc.

Petrobras, as Brazil's state-controlled oil producer is familiarly known, cut its five-year business plan to US$98.4 billion, the latest adjustment to the original US$130 billion announced last year.

The US Energy Information Administration reduced its forecast for WTI prices for 2016 by 24 per cent to US$38.54 a barrel. In its monthly Short-Term Energy Outlook, the agency said the oil market would come back into balance in 2017.

The call for oil in the US$20s grew louder in recent months, with Goldman Sachs pinning a 50 per cent chance of oil falling to US$20 in September and Morgan Stanley saying on Monday that a strong US dollar could drop oil below US$30. Mr Morse was first with the US$20s call, although he said last February that it could happen in the first half of last year followed by the market balancing.

"Right now the real driving factor is access to capital markets," Mr Sadeghian said by phone from Chicago. "US$20 oil just digs an even deeper hole from where you need to be before the markets open up again."