Yemisi Izuora/Joseph Bakare With Agency Report
Oil prices tumbled below $50 a barrel on Monday, spooking global financial markets and signaling that the remarkable 50 percent price drop since June was continuing this year and even quickening.
The new drop in American and global benchmarks of more than 5 percent was accompanied by reports of increased Middle Eastern oil exports, continuing increases in American production and renewed worries about the declining economic fortunes of Europe.
The plunge once again sent fear through global markets. The Standard & Poor’s 500-stock index fell 37.62 points, or 1.83 percent, to 2,020.58. The Vix, a measure of market volatility that is known as Wall Street’s fear gauge, leaped about 12 percent. And in Tokyo, the Nikkei 225 tumbled more than 2.5 percent Tuesday in morning trading.
In response, investors sought safety in government bonds around the world. As bond prices rose, the yield on the 10-year Treasury note fell to 2.03 percent on Monday.
The decline in oil was not the only source of concern in the markets.
Worries about Greece’s ability to stay in the eurozone have reasserted themselves in recent days, for instance. The dollar continued its surge against the euro on Monday.
Still, as the oil price decline has continued, investors have increasingly seen it as a bad omen for the global economy. The drop may point to lower demand for oil and lower economic activity. And the decline suggests that policy makers have not managed to deal with the threat of deflation, or falling prices.
“There is certainly a deflationary mind-set in the market,” said Jim Vogel, a debt markets strategist for FTN Financial, “and as we enter 2015, it’s beginning to nag some people that there could be a deflationary component to the economy.”
“It is a very shaky start for the oil market,” said Tom Kloza, global head of energy analysis for Oil Price Information Service. “The norm is a lot of money comes into commodity index funds at the beginning of the year, and that can create a market rally. Today, instead of new money coming into oil, you got some more old money going out of oil.”
West Texas Intermediate crude, for example, dipped below $50 a barrel for the first time in more than five years, and Brent crude, the global benchmark, fell more than 6 percent, to under $53 a barrel.
The drop in prices has led to a rising tide of oil company announcements in recent days of investment cuts for the coming months. Ensign Energy Services, a Canadian drilling contractor, reported that it would be laying off 700 workers, or roughly 10 percent of its work force, in California fields. Several Texas-based companies that have borrowed heavily in recent years to produce in new Texas and North Dakota shale fields are expected to announce steep investment and job cuts in the coming days.
Consumers continued to benefit from the oil price collapse, with the AAA auto club reporting on Monday that the average national price for regular gasoline had fallen to $2.20 a gallon, 8 cents lower than a week ago, 51 cents lower than a month ago, and $1.11 below a year ago. Energy experts say American families are likely to have as much as $115 billion more in disposable income in 2015 than last year because of lower gasoline prices alone. Additional benefits should come from drops in heating oil and diesel prices.
The last time oil and gasoline prices fell this low was in the wake of the 2008-9 financial collapse, when crude oil fell from well over $100 to below $40 a barrel in a matter of months. Energy analysts say the current price slump is of an entirely different nature, based primarily on a glut of oil being produced in the United States, along with increased production in Canada, Iraq and a handful of other countries.
While in the past the Organization of the Petroleum Exporting Countries has sometimes agreed to cut back production to shore up prices, Saudi Arabia and other Persian Gulf producers have decided to protect their global market share by cutting prices in the United States and Asian markets while increasing production somewhat.
In a recent interview with Middle East Petroleum and Economic Publications, based in Cyprus, the Saudi oil minister, Ali al-Naimi, indicated his country would remain steadfast rather than cut production anytime soon. “If I reduce, what happens to my market share?” Mr. Naimi said. “The price will go up and the Russians, the Brazilians, U.S. shale oil producers will take my share.”, a Bloomberg report said.
Adding further pressure to prices is the weakening demand for oil and petroleum products in Europe and developing nations. That weakness is compounded as increasingly efficient vehicles come onto the market and China seeks to reduce the oil dependence of its economy.
There is little reason to believe any of those trends will change until midyear at the earliest, energy experts say. According to Simmons & Company, based in Houston, the 93 million-barrel-a-day global market will continue to be oversupplied by at least one million barrels a day during the first half of 2015.
“It might be the dead of winter, but it looks as though markets will confront considerably more downside risk in the months ahead,” according to a Citi Research report released Sunday night, “and it will likely take well into the year before prices will bottom, let alone achieve a new equilibrium.”
Citi says it is most probable that the oil market will stabilize by the end of 2015, with the Brent price averaging $63 a barrel for the year — several dollars above the current price. But its more bearish forecast, with a 30 percent probability, is for Brent to average $55 for the year, roughly the current price.
Signs suggest that oil and oil product supplies will soon be increasing. The ramping up of several refineries in Saudi Arabia and the United Arab Emirates is likely to increase exports of products like gasoline and diesel by 500,000 barrels a day in the coming months. Even without the Keystone XL pipeline, other Canadian pipelines coming online will bring as much as 350,000 more barrels onto the market.
Citi has projected that global investments in oil exploration and production will decline up to 15 percent this year, but American companies continue to produce more efficiently. Rystad Energy, a Norwegian global consulting firm, issued a report on Monday saying that the average break-even price for the principal shale fields in the United States had dropped to $58 a barrel, with the core areas of some fields remaining economical to produce at $50.
Oil-producing states are expected to suffer economically from the oil price drop, although the top oil-producing state, Texas, has worked hard to diversify its economy after the price bust of the 1980s. With a projected $3.5 billion budget deficit, Alaska has already announced a delay in six important infrastructure projects, including a gas pipeline from the North Slope.