Tags: Oil | Crude | Price | OPEC

Oil Producers Betting on Price Drop With OPEC Unbending

Sunday, 11 Jan 2015 08:49 PM

The oil industry was listening as OPEC talked down crude prices to a more than five-year low.

Drillers, refiners and other merchants increased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since 1991, with some paying to break leases on drilling equipment.

Producers are hedging more and drilling less on concern that the biggest plunge in prices since 2008 will continue. Oil fell for a seventh week after officials from Saudi Arabia, the United Arab Emirates and Kuwait reiterated they won’t curb output to halt the decline.

“Producers are desperately hedging their production in a drastically falling market,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone Jan. 9. “They are trying to lock in prices because they are convinced that the market will stay down for a while.”

WTI fell $6.19, or 11 percent, to $47.93 a barrel on the New York Mercantile Exchange on Jan. 6, settling below $50 for the first time since April 2009. Prices ended at $48.36 Jan. 9.

OPEC Production

Members of the Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, have stressed a dozen times in the past six weeks that the group won’t curb output to halt the rout. The U.A.E. won’t cut production, no matter how low prices fall, Yousef Al Otaiba, the country’s ambassador to the U.S., said at a Bloomberg Government lunch in Washington on Jan. 8.

The group decided to maintain its output quota at 30 million barrels a day at a Nov. 27 meeting in Vienna. Members produced a total of 30.24 million barrels a day in December, according to a Bloomberg survey.

U.S. crude production was 9.13 million barrels a day in the seven days ended Jan. 2 after reaching 9.14 million three weeks earlier, the highest in weekly Energy Information Administration data since 1983. Stockpiles in the U.S. were 382.4 million barrels as of Jan. 2, a seasonal high.

The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which have unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota. Global oil prices below $40 begin to make wells in such places unprofitable to operate, Edinburgh-based consulting firm Wood Mackenzie said in a report Jan. 9.

Idling Rigs

Rigs seeking oil fell by 61 to 1,421, Baker Hughes Inc. said Jan. 9, extending the five-week decline to 154. It was the largest drop since February 1991, which also followed a slide in prices before the start of the Persian Gulf War.

Helmerich & Payne Inc., the biggest rig operator in the U.S., and Pioneer Energy Services Corp. said last week that they had received early termination notices for rig contracts.

Producers and merchants increased their net short position by 21 percent, or 17,577 futures and options, to 100,997 in the week ended Jan. 6, according to the Commodity Futures Trading Commission, the most since Jan. 10, 2012.

Hedge funds and other large speculators increased bullish bets by 7 to 199,395 contracts.

“You have this tension and lack of consensus among money managers of what to do with a price under $50,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone Jan. 9. “People tend to think of money managers as a black box where they all use same strategy and march in lockstep, but this highlights that it’s not really the case.”

Other Markets

In other markets, bearish wagers on U.S. ultra low sulfur diesel decreased 12 percent to 23,789 contracts as the fuel sank 7.6 percent to $1.7262 a gallon.

Net short wagers on U.S. natural gas sank 15 percent to 10,323 contracts. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Nymex natural gas dropped 5 percent to $2.938 per million British thermal units.

Bullish bets on gasoline fell 0.4 percent to 44,050. Futures slumped 6.8 percent to $1.3543 a gallon on Nymex in the reporting period.

Regular gasoline dropped 1.3 cents to an average of $2.139 on Jan. 10, the cheapest since May 5, 2009, according to Heathrow, Florida-based AAA, the country’s largest motoring group.

The global crude oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates. Only 1.6 percent of global oil supply would be unprofitable with prices at $40, according to Wood Mackenzie.

“If you’re a producer and your cost is below the price in the market, if you hedge it even at depressed prices you can still make money,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone Jan. 9. “Somebody’s locking in profits even at these low prices.”

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The oil industry was listening as OPEC talked down crude prices to a more than five-year low. Drillers, refiners and other merchants increased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since...
Oil, Crude, Price, OPEC
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2015-49-11
Sunday, 11 Jan 2015 08:49 PM
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