Sector News

Oil prices falling, but maybe not for long: Jefferies

September 16, 2014
Oil prices have fallen 15% over the past year, and they could slide further before stabilizing. That’s good news for U.S. consumers who are paying an average of $3.41 for a gallon of regular gasoline — the lowest price in six months, according to AAA.
“There’s some downside still on prices, but I think we’re near the bottom here,” says Andrew Lebow, a senior VP for energy derivatives at Jefferies Bache. “Maybe another dollar or two on WTI and maybe another dollar or two on Brent…. We’re near the lows.”
Sweet West Texas Intermediate crude is now trading just below $92 a barrel, down from $108 a year ago. Brent crude from the North Sea is trading at $97 a barrel — near a two-year low, and at the narrowest spread to WTI since July.
Behind the drop in oil prices is a decline in demand coupled with an increase in supply despite all the turmoil in the Mideast and between Russia, a major energy producer, and Ukraine.
Global oil demand has fallen to its lowest level in 2-1/2 years because of the weakening economy in Europe and China, according to the International Energy Agency (IEA). That’s contributing to a glut in supply which also reflects an explosion in U.S. oil production.
“In 2008 U.S. crude production was 5 million barrels a day,” says Lebow. “It’s now 8.6 million barrels per day and next year it’s going to be 9.5 million barrels per day. ….That’s had a significant effect on world markets.”
The U.S. in fact has become the world’s largest energy producer as a result of hydraulic fracking, which produces both oil and natural gas from shale, and the boom “has more room to run,” writes Russell Gold in today’s Wall Street Journal.
But that expectation should not obscure the potential for a supply cutoff, says Lebow. “We can’t ignore the fact that Libyan production which has increased now to over 800,000 barrels per day and was just a few months ago 100,000 barrels per day,” says Lebow. “And just a few months ago we were worried about supply disruptions from Iraq. It’s a dangerous world. Energy prices are not completely secure.”
Former BP CEO Tony Hayward, as quoted in the Financial Times today, says, “The world has been lulled into a false sense of security because of what’s going on in the U.S. When U.S. supply peaks, where will the new supply come from?” He’s concerned that sanctions imposed by Western nations on Russia will reduce investment in Russian oil fields and ultimately limit global energy supplies.
By Bernice Napach

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