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Oil could crash to $10 a barrel, investment bankers warn

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OIL GLUT

Oil prices have fallen to fresh lows of less than $30 a barrel amid warnings the price rout could reach as low as $10 and bring down petrol prices to levels last seen in 2009.

Oil last slumped to $10 during the height of the Asian financial crisis in 1998 and with OPEC blasted as “irrelevant” in the new Hobbesian oil market, the world’s supply glut is reaching record levels. OPEC OIL PRODUCTION

Standard Chartered became the latest major bank to downgrade its oil outlook, joining the likes of Goldman Sachs, RBS and Morgan Stanley in making ultra-bearish calls as prices have collapsed by 15pc this year.

Brent crude has now slipped to a fresh 12-year low of $30.41 a barrel, while West Texas Intermediate – the US benchmark – is trading at $29.93. Analysts warn the oil market remains fundmentally out of balance as record over-supply and stagnant demand weighs on traders.

Standard Chartered said there would be no bottom in sight, until prices fall to $10 and “money managers in the market conceded that matters had gone too far”.

“Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the dollar and equity markets,” said Standard Chartered.

A $10 world would lead to petrol prices falling back to 86p-per-litre – said Simon Williams at RAC.

“The last time we saw average prices this low was in early 2009”, said Mr Williams. “However, for prices to get this low the pound would have to get no weaker against the dollar than it is today.”

Christine Lagarde, chief of the International Monetary Fund, said supply and demand factors meant commodity prices would “likely to stay low for a sustained period”.

Calling the bottom of the market was “akin to catching a falling knife” in today’s febrile environment, said Michael Hewson at CMC.

“When the clamour for lower prices becomes a stampede, warning signs and alarm bells tend to start going off, which suggests that a more prudent approach might be advisable,” he said.

The warnings came as Opec – the cartel that controls a third of the world’s supply – said it would not cede to requests from some of its members to hold an emergency meeting.

Opec meets twice a year, but its latest gathering in December ending in a fractious stalemate over production targets, as Saudi Arabia and Iran struggle for dominance of the world’s market share.

With the next regular meeting is scheduled for June, Nigeria’s oil minister yesterday said at least two members had called for an extraordinary gathering to address the price rout. But hopes were quickly dashed after the United Arab Emirates said dismissed the prospect.

Energy minister Suhail bin Mohammed al-Mazroui said Opec’s decision to maintain production and crowd out rivals was still bearing dividend, hinting that it would take another 18 months for prices to start picking up.

“I’m not convinced Opec alone can change or can solely unilaterally change this strategy just because we have seen a low in the market,” said Mr al-Mazroui.

The 13-member cartel has previously said it would only agree on lower production targets if non-Opec states – notably Russia – also signed up to reduce their record output.

“Something has to give,” warned analysts at Energy Aspects, who calculate that demand for oil ground to halt due to an unsesaonably warm end to the year.

“The scale of supply declines has to be even higher to kick-start the rebalancing. So even though weather is normalising somewhat, and supplies are starting to decline, the risk of further price falls and weakness in spreads is still on the cards.”

Elombah.com with reports from UK Telegraph


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