Oil Trades Near 5-Year Low as Saudis Question Need to Cut Output

By Grant Smith Dec 11, 2014 5:30 AM PT

Photographer: Daniel Acker/Bloomberg

OPEC cut the forecast for how much crude it will need to provide in 2015 to the lowest... Read More

Brent and West Texas Intermediate traded near the lowest price since July 2009 as Saudi Arabia questioned the need to cut output, bolstering speculation that OPEC’s biggest producer will defend market share.
Brent futures were little changed in London, paring an earlier advance of 1.4 percent. The market will correct itself, according to Saudi Arabian Oil Minister Ali Al-Naimi. Global demand for crude from the Organization of Petroleum Exporting Countries will drop next year by about 300,000 barrels a day to 28.9 million, the least since 2003, the group predicted yesterday.
Oil’s collapse into a bear market has been exacerbated as OPEC’s three largest members offered the deepest discounts on exports to Asia in at least six years. The group, which
supplies about 40 percent of the world’s crude, decided against reducing its output quota at a meeting last month even as the U.S. pumps at the fastest pace in more than three decades.
“It was not only the threat of oversupply that put the price under such heavy pressure, but above all the lack of a response from OPEC, and Saudi Arabia in particular,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said in a report. The Persian Gulf kingdom “does not appear willing to reduce the supply.”
Brent for January settlement was at $64.25 a barrel on the London-based ICE Futures Europe exchange, up 1 cent, at 1:29 p.m. local time. It slid $2.60 to $64.24 yesterday, the lowest settlement since July 2009. The European benchmark crude traded at a premium of $3.65 to WTI. Prices are down 42 percent in 2014.

OPEC Decision

WTI for January delivery dropped as much as 64 cents, or 1.1 percent, to $60.30 a barrel in electronic trading on the New York Mercantile Exchange, the lowest since July 2009. Total volume was 13 percent above the 100-day average for the time of day. Prices have decreased 38 percent this year.
Saudi Arabia led OPEC’s decision on Nov. 27 to maintain its collective quota at 30 million barrels a day, resisting calls from members including Venezuela to reduce output. The group pumped 30.56 million barrels a day in November, exceeding its target for a sixth straight month, a Bloomberg survey of companies, producers and analysts showed.

Saudi Response

“Why should I cut production?” Al-Naimi said to reporters yesterday in Lima, Peru, where he’s attending United Nations climate talks. “This is a market and I’m selling in a market. Why should I cut?”
Venezuela wants special discussions to be held before the group’s next scheduled gathering on June 5, Foreign Minister Rafael Ramirez said on the Telesur network yesterday. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years has jumped to 60 percent, pushing the implied probability of default to 94 percent, the highest in the world.
“Our position on OPEC is that they defend the fair price of our oil,” Ramirez said. “We don’t believe in the free market. We must make an effort to reduce overproduction of oil.”
Kuwait offered the biggest discount to its Asian customers since December 2008, following Saudi Arabia and Iraq in reducing export prices. Kuwait Petroleum Corp. will sell its crude at $3.95 a barrel below a Middle East benchmark next month, the state-owned company said in a faxed statement yesterday.

Shale Oil

Production in the U.S., the world’s largest oil consumer, expanded to 9.12 million barrels a day through Dec. 5, the Energy Information Administration reported yesterday. That’s the fastest rate in weekly records that started in January 1983, according to the Energy Department’s statistical arm.
The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which has unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota.
U.S. crude inventories increased by 1.45 million barrels to 380.8 million last week, the EIA said. Stockpiles had been projected to shrink by 2.7 million, according to the median estimate in a separate Bloomberg survey of eight analysts.