Brent crude hits 4-year low as producers compete for market share

By James Dennis

SINGAPORE (ICIS)–Crude prices fell further on Monday, falling by more than $1/bbl – pushing Brent to its lowest level in four years at one stage – amid an oversupplied market and signals OPEC members are focussed on competing for market share rather than cutting production.

At 06:03 GMT, November Brent crude on London’s ICE futures exchange was trading at $89.08/bbl, down by $1.13/bbl from the previous close. Earlier, the North Sea benchmark fell to a session low of $87.74/bbl, down by $2.47/bbl and the lowest intraday trading  level since 1 December 2010.

November NYMEX light sweet crude futures (WTI) were trading at $84.78/bbl, down by $1.04/bbl from the previous close. Earlier, the US benchmark fell to a low of $84.25/bbl, down $1.57/bbl.

ICE Brent crude futures have fallen by more than 20% since hitting the year’s high of  $115.71/bbl in June 2014.

The oil market has been undermined by a combination of weakening global oil demand growth and increased supplies from leading non OPEC producers US and Russia.

Meanwhile, OPEC members have not shown great enthusiasm to cut output. The organisation members appeared more focussed on competing for market share, particularly in Asia.

Over the weekend, the Kuwaiti oil minister told state news agency KUNA that OPEC was unlikely to cut production in response to price falls. The minister was also quoted as saying that $76-77/bbl  could likely be a floor to the declining prices as this was the cost of production in the US and Russia.

There were also media reports that Saudi Arabia is not keen to cut production. It was noted that falls in prices could also slowdown the increase in production of rival shale oil or light tight oil (LTO) by the US.

Many OPEC members require high prices oil prices above $100/bbl to meet their budgetary commitments. Indeed, over the weekend, the Venezuelan foreign minister called for an urgent OPEC meeting to deal with falling oil prices. OPEC is scheduled to meet in Vienna on 27 November.

Market sources said that Iran has cut the official selling price for its November light crude sales to Asia to its lowest  level since December 2008.  The move by Iran follows a decision earlier this month by Saudi Arabia, which also cut its official selling prices to Asia to their lowest levels since December 2008. 

Meanwhile, Nigerian oil sales, which have already been hard hit by the reduction in US imports, have been weak in November. This follows increased competition from fellow OPEC member Angola which  recent cut its official prices.

Citing third party sources, OPEC reported that the group’s production rose in September by the most in three years.

OPEC, which supplies 40%  of world demand, said that production in September increased by 402,000 bbl/day to 30.47m bbl/day, the largest rise since November 2011.

The rise was principally attributed to increased supplies from Libya and Iraq. According to the secondary sources quoted by OPEC, Libya raised its supplies 250,600 bbl/day to 787,000 bbl/day. Iraq added 134,500 bbl/day to 3.164m.

Meanwhile, Saudi Arabia directly informed OPEC that it increased production by 107,100 bbl/day to 9.704m bbl/day in September.

US crude production has continued to rise sharply, boosted by the use of hydraulic fracturing and horizontal drilling techniques which have allowed the exploitation of shale oil or light tight oil reserves.

US crude production in September hit 8.7m bbl/day, the highest level since July 1986 according to the  US Energy Information Administration (EIA).  The EIA expects US production reach 9.5m in 2015 – which would be the highest level since 1970.

Russian output in September hit 10.6m bbl/day, just below record levels reached in January this year, according to  the nation’s Energy Ministry.

With global economic growth rates easing, demand has failed to keep pace with increases in oil supplies during 2014.

Last week, the International Monetary Fund (IMF) reduced its global economic growth forecast to 3.3% for 2014 and 3.8% for 2015. Growth forecasts were cut on concerns over weaker growth in core eurozone economies and Japan, as well as large developing nations like Brazil.

The IMF kept its growth forecast for China at 7.4%.

On Monday, China’s General Administration of Customs announced that the country’s September crude imports increased 9.5% month on month to 27.58m tonnes.  The  government body also said that China’s imports of oil products fell by 2.4% to 2.47m tonnes, while exports of oil products fell 21.2% to 2.15m tonnes during the same period.

The IMF expects the US economy to grow by 2.2% in 2014, which is above the growth rates in the eurozone and Japan.

Nevertheless, the EIA actually expects US oil demand to fall 40,000 bbl/day to 18.92m bbl/day – its lowest level since 2012. The decline in demand can be partly attributed to increased fuel efficiency and a rise in the use of gas in the world’s largest economy.

The EIA estimates that global  production of petroleum and other liquids will rise by 1.6m bbl/day in 2014 to 91.76m bbl/day. Meanwhile, the EIA forecasts global consumption will average 91.47m bbl/day in 2014, up 1.02m bb/day.

In September, the International Energy Agency (IEA) had lowered its oil demand growth forecasts for 2014 and 2015 to  900,000 bbl/day and 1.2m bbl/day, respectively. Cuts were made because of weak oil demand growth in the second quarter of 2014 and weak economic outlook for China and Europe.

According to the IEA, global oil demand growth is centred on developing non-OECD economies, which now account for more than half of all global oil demand.

Oil demand from the developed OECD economies is expected to decline by 250,000 bbl/day in 2014.