Oil Slides to $35, Where does it go from here?
Jan 15th, 09
As oil hits $35, major investments to future projects have curtailed, and some companies have resorted to leasing supertankers to store oil offshore.
Crude oil prices fell to settle at $35 a barrel, the lowest in nearly four weeks and precariously close to five year lows. Several factors were to blame for this decline, as unemployment benefit claims rose, domestic crude supplies rose, and OPEC released a statement predicting demand would fall in 2009.
The recession dampened fuel usage in the U.S. and recent figures from the Labor Department show a rise in new filings for unemployment benefits as well as an 81% increase in foreclosure activity for 2008. The demand for fuel in the U.S. fell 6% in 2008, the largest drop since 1980, while crude stockpiles increased by 1.14 million barrels to hit 326.6 million barrels last week – the highest since August 2007.
The Organization of Petroleum Exporting Countries changed its global demand estimate for 2009 by 20,000 barrels to 85.66 million barrels a day, bringing this year’s reduction to 180,000 barrels a day. In a December 17th meeting, OPEC had agreed to a record 9% cut in supply targets as a reaction to the drop in prices. Saudi Arabia has recently announced that it will reduce output by more than what was announced at that December meeting. OPEC stated that there would be a major contraction in demand among members of the Organization for Economic Cooperation and Development, with the United States being the “main contributor,” to the reduction.
Meanwhile, gasoline has become more expensive because refineries have been producing less as profits from refining have thinned. Some refiners are even losing money by producing gasoline; so many operations have turned to selling oil to traders or changing their refineries to produce products such as heating oil or diesel and jet fuel because of the better profit margins.
With crude prices so low, many different groups are finding ways to store oil. Supertankers filled with oil are presently at anchor or simply circling the seas, effectively serving as floating oil storage facilities. Countries and companies such as Citigroup and Royal Dutch Shell are leasing the tankers to try and profit in the future. As land based storage tanks start filling up, Frontline Ltd., the world’s biggest owner of supertankers, reports that currently there are nearly 80 million barrels of crude oil stored aboard 35 supertankers and some smaller tankers – the most in 20 years.
As the buildup of supplies has come in just the last few months, the different organizations have their own reasons in storing oil. While some traders are trying to profit by buying oil now while it is cheap to sell at a higher price later, some national oil companies are hoping to store the oil and help increase the price by holding their production off the market.
The continued volatility in the market can only serve to exacerbate the problem as it sends mixed signals throughout the exploration and production links of the industry. It was barely six months ago when companies throughout the energy networks were rushing oil to market, working around the clock to keep up with the ever increasing demand and rising prices. Now, as the global economy slumps, demand falling and people driving less, the global demand for oil has plunged — and the same companies are reacting in ways that would have been unimaginable until recently.Independent exploration companies are forced to cancel projects, refiners are shifting away from gasoline to other, more profitable products, drilling companies have seen a reduced demand for drilling rigs, and overall financial planning throughout the industry is in a state of anxious uncertainty.
The screeching halt to oil investments is so abrupt that many analysts believe it is only a matter of time before shortages are apparent, pushing oil prices to new highs and creating further damage to a fragile economy. With this much volatility throughout the industry, nobody can say for certain what the future holds.