Crude oil prices hit a three-month low Monday and are testing the multi-year low they hit in August after a chaotic OPEC meeting on Friday ensured that the price war unleashed by Saudi Arabia last year will last well into 2016.
By 1000 Eastern Time, the benchmark front-contract for West Texas Intermediate was at $38.37 a barrel, down 7.8% from before the weekend, as traders built new bets on the world economy’s most important commodity getting even cheaper in the next months, as the heavyweights of the Persian Gulf duke it out for market share. A stronger dollar, supported by expectations of a first U.S. interest rate rise in nine years this month, is also pushing prices lower.
It was a measure of how deep the divisions are running at the Organisation of Petroleum Exporting Countries that the cartel couldn’t even agree on a notional ceiling for its production when they met in Vienna last week. OPEC countries routinely produce more than their formally agreed ‘quota’ when they can, but at least they can generally agree a number to cheat on.
The outcome was “a complete mess,” said Georgi Savov, head of research at brokerage Marex Spectron in London.
Sharing the ‘pain’ of output rationing was even more difficult than usual this year, because Iran found itself in the unusual position of being able to ramp up output sharply if sanctions are lifted, and consequently didn’t want any limitations on its plans.
With none of the other major members of OPEC prepared to blink, the speed at which Iran can ramp up output in 2016 is now one of the key variables for supply/demand balance. There are also big ‘above-ground’ unknowns in Libya, where civil war has sharply curtailed production, and Iraq, where it has failed to have any visible impact this year.
Analysts at Barclays have revised their average forecasts for 2016 down to $56 a barrel for WTI and $60 for Brent, saying that recent increases in supply from Saudi Arabia, (non-OPEC) Russia, Nigeria and even the North Sea has more than outweighed rising demand from China and other emerging markets.
Barclays believes that it will be U.S. production that takes the strain for the next couple of years, as low prices prevent any further rise in output. Drilling activity, they note, is already dropping off due to low prices–not only in the U.S., but also in countries like Russia and Mexico.
But even if production in higher-cost areas falls, there’s a huge amount of unsold oil in storage just waiting to meet any sign of an upturn in prices. The International Energy Agency said last month crude stockpiles have hit a record 3 billion barrels–over a month’s worth of global consumption. Marex Spectron’s Savov reckons it would take a good three months for that excess inventory to be drawn down and allow any sort of meaningful rally.
UPDATE: This article has been updated to include data from the IEA and comment from Marex Spectron, as well as fresher price data.