What’s Behind The Crash In Crude?
Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.
The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.
Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth. “The Cushing number came in higher than anticipated … it’s definitely pointing to the concern that there’s more supply and demand is weakening,” said Phil Flynn, analyst at Price Futures Group in Chicago, according to Reuters. “The market is still very nervous about that.”
Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.
The EIA said in its latest Drilling Productivity Report that it expects U.S. shale production to top 8.1 million barrels per day (mb/d) in January, rising by a massive 134,000 bpd month-on-month. The Permian alone will see production rise by 73,000 bpd next month. By way of context, the gains in the Permian are bigger than even some of the large monthly declines that we have seen in Venezuela, for instance.
Still, with WTI dropping below $50 per barrel, shale drillers will start to face increasing financial strain. That could force a slowdown in the shale patch. “We’re probably going to see a supply slowdown in the U.S.,” Michael Loewen, a commodities strategist at Scotiabank, told Bloomberg. “I do think that producers will react.”
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