Price fall to push oil industry into 'sharp recession', says expert

The free fall in oil prices continued yesterday as global business growth slowed to its weakest in a year, and analysts said a growing supply glut meant more falls were likely.

Benchmark Brent oil sank under $50 for the first time since 2009, hit by Organisation of the Petroleum Exporting Countries (OPEC)'s stance on maintaining its current production levels, market oversupply, weak demand and the strong dollar, analysts said.

In morning London deals, Brent North Sea crude for delivery in February dived to another 5.5-year low at $49.66 a barrel, last seen in April 2009. "Brent crude broke through the psychologically-significant $50 a barrel this morning," said analyst Craig Erlam at trading firm Alpari.

"The fact that traders barely even hesitated at this level makes $40 a barrel for Brent crude look extremely likely." US benchmark West Texas Intermediate (WTI) for February also tumbled yesterday to a similar low at $46.85, having already collapsed under the symbolic $50 level on Monday.

Weaker currencies

Oil also sank as the euro hit another nine-year low at $1.1843 on lingering fears that Greece could leave the eurozone if an anti-austerity opposition party wins a general election on January 25. The strong greenback makes dollar-priced oil more expensive for buyers using weaker currencies, and this weighs on demand and prices.

"The move below $50 shows how momentum is everything here," CMC Markets analyst Michael Hewson told AFP.

"With no sign that OPEC will do anything about over-production, it seems likely that we could well see further declines towards $40 in the coming weeks -- particularly given that demand shows no signs of picking up.

"Weak growth and weak demand in China and Europe are likely to continue to be the main drivers as the battle for market share intensifies. We will probably still see sharp swings in the interim but the direction of travel seems clear, unless OPEC acts."

Traders were meanwhile awaiting the weekly snapshot of crude inventories in the US, which is the top global consumer.

Brent later stood at $50.47, down 63 cents from Tuesday's close. WTI was 46 cents lower at $47.51. The oil market had also slumped Tuesday to multi-year lows in another stormy day for global financial markets, as OPEC kingpin Saudi Arabia blamed weak global economic growth and declared it will stick to its guns on crude production policy.

On Monday, Saudi Arabia had reportedly cut its European and US export prices in order to maintain market share. Oil has lost more than half its value since June 2014 owing to a global supply glut and slowing growth in major world economies that has hurt demand.

Losses accelerated late last year after the 12-nation Organization of Petroleum Exporting Countries (OPEC) cartel decided not to cut output in response to lower prices and oversupply.

"As far as the slide in oil prices is concerned, there seems to be no end in sight for now," added analyst Markus Huber at broker Peregrine & Black. "There is too much oil on the market partially due to sluggish growth in the eurozone and slower growth in China."

OPEC opted in November to keep its oil output ceiling at 30 million barrels per day (mbpd) despite ample global supplies. Analysts said the move was aimed at stifling competition from new market players with higher costs -- in particular US shale oil producers.

However, while some well-heeled OPEC members are playing a long game to protect their market share in the face of a US shale boom, other oil giants are struggling to balance the books. Venezuela, Nigeria and Iran, and major non-OPEC oil producer Russia, are desperate for prices to recover.

"With OPEC unwilling to make major cuts in oil production as it wants to retain its market share ... and other countries like Russia whose economy is in decline not able to afford any (oil output) cuts, the imbalance between too much supply and only moderate demand seems to persist for the foreseeable future," added Huber.

Investment bank Evercore IS warned on Tuesday that the oil price plunge would force energy companies to slash capital spending in North America, Europe and Asia in 2015.

However, it added, that investment would continue to rise in Africa and the Middle East as producers in those areas seek to boost long-term output in the flooded global oil market.

Evercore estimated that oil companies would cut spending on exploration and production globally this year by 10 to 15 per cent, and by 25 to 30 percent in North America.

Spending plans

"To sum it up, a sharp recession is coming to the global oilfield," said James West, an oilfield services analyst at Evercore, after surveying 300 global oil and gas companies on their 2015 spending plans.

The report shows the impact of the steep drop in oil prices. US oil prices Tuesday closed at $47.93, down from nearly $107 in June.

The oil-price crash is also beginning to reverberate across other industries. US Steel plans to lay off hundreds of workers due to lower petroleum industry demand for pipes, a union source said Tuesday. About 750 workers are expected to lose their jobs, according to US media.

Evercore said the oil industry is contending with lower cashflow and a lack of access to capital. Independents are especially vulnerable.