This video is sponsored by Bloomberg BNA and Mayer Brown, and their September Energy Tax Conference.
Story by Darren Barbee, Hart Energy
China’s economic woes sent the stock market veering sharply off course Aug. 24 before rebounding, but oil prices continued a rough slump heading toward September.
“Crude and natural gas were both caught up in the global financial meltdown as crude fell over $2 per barrel while natural gas was less affected, shedding a nickel down the curve,” said Andrew Fletcher, senior vice president of commodity derivatives, KeyBank National Association. “Although a full global recession is unlikely, concern over the faltering Chinese economy is prompting a correction in world equity markets.”
At one point, the Dow Jones Industrial Average fell 1,089 points or 6.6%, the sharpest decrease since May 2010 when prices fell 998.50 points or 9.2%. The Dow was poised to close down about 600 points at press time, the second straight trading day it has lost at least 500 points.
WTI prices, which by now are used to being roughed up, were beaten down. NYMEX prices for WTI closed at $38.22, the 24th day prices were below $50 and the lowest since early 2009. On Aug. 21, WTI closed down 2.1%, and Henry Hub gas fell 2.9%, Raymond James said.
In recent years China has been a global growth engine, but signs have emerged that it is now entering a contraction phase as manufacturing output stumbles.
“A faltering China is sending ripples through the global markets, and a slowdown in China means a slowdown for the rest of the globe,” Fletcher told Hart. “As far as oil is concerned we are still in an oversupplied situation but we are looking forward to increased demand in 2016. However, a slowdown in China will severely dent the expected growth in demand.”
Fletcher noted that the equities markets have had no real correction in roughly four years.
“We are perhaps overdue,” he said. “I doubt we are through the woods yet but there are encouraging signs as far as oil is concerned.” However, any recovery in prices will need a stabilization of other commodity and equity markets.
Oil prices have fallen by more than 30% since June due to continued supply increases from OPEC, U.S. and other sources, said Jeff Dietert, head of research, Simmons & Co. International in a report.
OPEC supply has increased 1.5 million barrels per day (MMbbl/d) so far in 2015 and represents the major culprit contributing to the current oversupply, Dietert said.
Growth in petroleum production and other liquids has outpaced consumption growth since August 2014 with rising liquids stocks globally, the U.S. Energy Information Administration (EIA) said Aug. 24.
Global liquids inventories have grown by an estimated 2.3 MMbbl/d through the first seven months of 2015, the highest level of inventory builds through July of any year since 1998.
The EIA estimates global consumption of petroleum and other liquids grew by 1.1 MMbbl/d in 2014, averaging 92.4 MMbbl/d for the year. Through July 2015, global liquids consumption has grown by an additional 1.2 MMbbl/d.
In 2014, most global liquids production growth came from countries outside of the Organization of the Petroleum Exporting Countries (OPEC), particularly the U.S. while production from OPEC fell. In 2015, growth is coming from OPEC and non-OPEC countries.
U.S. oil production hit a peak in March/April at 9.7 MMbbl/d, dropping to 9.5 MMbbl/d in May.
“We expect modest declines in the third quarter of 2015 before rising slightly in the fourth quarter of 2015, supported by the completion of Alaska summer maintenance and contributions from new GoM project additions,” Dietert said.
He expects global demand growth to slacken in the second half of 2015 to 1.45 MMbbl/d from 1.7 MMbbl/d in the second quarter of 2015.
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