Brent crude next bottom forecasted at $40 per barrel

Brent crude settled at sub-$62 per barrel – the lowest level since 2009, as investors increased their short positions in anticipation of lower prices into the New Year amid reports of lower demand from several energy organizations.

The International Energy Agency, the Organization of the Petroleum Exporting Countries and the US Energy Information Administration all cut their estimates for oil-demand growth fuelling the bearish sentiment.

“Barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout,” the IEA said in its report.

The IEA cut its 2015 global oil demand growth forecast by 230,000 barrels per day to 0.9 million barrel per day on Friday. This was the fifth cut in six months.

Meanwhile, OPEC’s monthly report forecast that global demand for the group’s oil will drop to 28.9 million barrels a day next year, the lowest in 12 years, and down from 29.4 million barrels a day in 2014.

Saudi Arabia’s oil minister, Ali al-Naimi, reiterated on the day the report was released that Jeddah has no plans to restrict output, further fuelling the bearish sentiment.

All these news hitting the crude oil market has stepped up the battle for market share amongst oil producers.

Displaced by surging US oil production, millions of barrels of Nigerian crude now head to India, Indonesia and China, where Middle Eastern nations are trying to entice the same buyers.

Kuwait lowered its official selling price for its crude in January, following similar moves from Saudi Arabia and Iraq.

Nigeria has changed its benchmark price twice in the last few weeks, from $78 a barrel to $73 a barrel and lately to $65 a barrel – a level that is now above the market price of crude.

Brent crude has fallen nearly 47 percent since June, when it climbed near $116, while WTI futures are down almost 46 percent from the recent peak of $107.50 in June.

“The fundamentals should not lead to this dramatic reduction [in price],” said Abdullah al-Badri, the secretary general of OPEC at an event in Dubai and reported by Reuters, implying that speculation on futures has mostly stoked the fire.

Al-Badri’s comments at the Dubai event were the first he has made since OPEC chose to leave its output levels unchanged at a meeting last month. In his remarks, he reiterated that the group has no target price for crude, meaning any change in its policy on production levels is unlikely, in the short term at least.

The oil-price plunge may not end soon. Since falling below the $65 per barrel bottom forecasted by energy analysts, Bank of America Merrill Lynch says oil prices could drop to $50 in 2015.

Jeff Rubin, former chief economist at CIBC World Markets, thinks the drop could be further.

“If crude prices end up mimicking their fossil-fuel cousin (coal), prices could be heading as low as $40 a barrel…in the not-too-distant future,” he wrote in a commentary.

Technical analysis point to a drop to $40 a barrel if prices drop below $60 a barrel. $60 is the next support level after $65, after which $40 becomes the next support level.

According to an energy analyst, “the price of crude goes up and goes down. What is different this time around is that in 2015, prices are expected to be depressed longer, probably up to the half year.”

This is as a result of hedging strategies that provide quasi-insurance to shale producers, a favourable US federal tax code that protect shale producers even at low price levels and the slowdown in global demand, he explains.

Adam Longson, Morgan Stanley analyst points out that the cash cost – the variable operating cost is the relevant metric to point out when existing production will begin to shut down.

Globally, the cash cost is closer to $35 – $40 a barrel at the high end of production.

Yinka Abraham