MarketWatch: 4 key reasons behind oil’s latest price drop: Friday September 11, 2015

4 key reasons behind oil’s latest price drop

By Myra P. Saefong

Published: Sept 11, 2015 5:22 p.m. ET

By

MyraP. Saefong

Markets/commodities reporter
Slide 1 of

Oil’s outlook just keeps getting worse.

On Friday, analysts at Goldman Sachs added to the dour projections for
crude by saying the potential for oil prices to fall near $20 a barrel
is ‘becoming greater as storage continues to fill.’

Goldman Sachs says the global-oil market will remain in a supply
surplus until the fourth quarter of 2016, according to its Friday
research note.

The ominous Goldman note helped tip Brent crude, and West Texas
Intermediate oil trading on the New York Mercantile Exchange,

Brent crude LCOV5, -1.49% shed 75 cents, or 1.5%, to $48.14 a
barrel on the ICE Futures exchange, leaving it down 3% for the week.
October WTI crude CLV5, -2.48% lost $1.29, or 2.8%, to settle at
$44.63 a barrel to post a 3.1% weekly decline.

That Goldman’s dire $20-a-barrel worst-case prediction is targeted at
Brent oil’the international benchmark’bodes ill for the U.S. benchmark,
WTI, which typically trades at levels lower than Brent.

But Goldman isn’t the only drag on crude-oil prices. Here are some of
the other key reasons for oil’s latest tumble:

Goldman Sach’s oil-price forecasts.
Slide 2 of

Lower price forecasts

Lower oil-price forecasts seem to have become the norm as the global
glut of supplies persists.

Helping push oil down is Goldman Sachs’s decision to cut its 2016
forecast for Brent crude to $49.50 a barrel from a previous forecast of
$62. The investment bank cited Iran’s potential to ramp up production
next year as well as surprisingly high supply from the Organization of
the Petroleum Exporting Countries.

It also lowered its 2016 WTI oil-price forecast to $45, from $57
previously.

Earlier this week, the U.S. Energy Information Administration also

Ali al-Naimi, Saudi Arabia’s minister of petroleum and mineral
resources.
Slide 3 of

OPEC inaction

To the oil market, it almost seems like OPEC isn’t even trying to help
stem the flow of oil or the drop in prices.

Despite increasing calls from oil producers, including Venezuela, OPEC
hasn’t announced any plants to hold an emergency meeting. Its next
scheduled meeting is set for December.

Venezuela had asked the cartel to consider a coordination with non-OPEC
Russia. But analysts have said that Saudi Arabia, the group’s largest
oil producer, has made it clear that it will not lower output as it

In recent years, the shale boom and increased production from the U.S.
has ‘greatly reduced OPEC’s [ability to dominate] world oil markets,’
said Charles Perry, chief executive officer of energy-consulting firm
Perry Management.

In a monthly report issued in late August, OPEC said there is ‘no
quick fix’ for the low oil-price environment. The cartel’s next

‘Bottom line, we do not expect OPEC to cut at the December meeting and
non-OPEC production will not fall fast enough for OPEC to change before
next summer,’ said James Williams, energy economist at WTRG Economics.

Oil tanks belonging to Indonesia’s state energy firm Pertamina.
Slide 4 of

Indonesian and Iranian oil

OPEC must also deal with the fact that more oil will be coming to the
global market, which will further exacerbate the glut of supplies.

The cartel told Indonesia this week that the country may rejoin
OPEC as a member when the cartel next meets in December.

‘In the short term, Indonesia will likely produce the same amount of
oil whether it is a member of OPEC or not, although this could change
if the country is able to attract more investment as an OPEC member,’
Colin Cieszynski, chief market strategist at CMC Markets said after the
news. Indonesia’s oil production was estimated at around 930,000
barrels a day in 2013.

Meanwhile, Iranian production will be another issue for OPEC to contend
with.

Iran’s nuclear deal is making progress toward U.S. government
approval. There are some doubts about Iran’s ability to ramp up
crude output, but the oil market appears content, for now, to expect
that Iran will eventually add somewhere around one million barrels a
day to the world market.

BP’s Whiting, Ind. refinery experienced an unexpected outage earlier
this year.
Slide 5 of

U.S. refinery maintenance

With the summer-driving season over, demand for gasoline declines and
U.S. refinery maintenance for the Fall season kicks in.

Surprise outages at various refineries this year already caused spikes
in U.S. gasoline prices at the pump and increases in crude inventories.

‘Occasionally, when a plant faces unexpected major maintenance on a
certain unit, they will sometimes expand it to take on all of their
other routine maintenance while they are down, which will be needed for
the next few months,’ said Perry. ‘This unexpected major maintenance
can occur anytime during the year.’

For the week ended Sept. 4, the EIA reported a drop of 1.9% in
refinery utilization as well as bigger-than-expected increase of 2.6
million barrels in crude-oil supplies.

The refinery slow down due to routine maintenance, turnarounds, and
end-of-summer driving ‘will decrease demand for crude,’ said Perry.

However, he pointed out that ‘in general, the market knows these are
coming every fall and have mostly discounted them.’

‘Their impact on the market for crude is nothing like a big refinery,
unexpected calamity would be (such as a hurricane or explosion),’ he
said.

Myra P. Saefong

Myra Saefong is a MarketWatch reporter based in San Francisco. Follow
her on Twitter @MktwSaefong.

MarketWatch Article Source Here.

As of: Fri Sep 11 16:30:03 MDT 2015