Brent crude oil dropped below $50 a barrel in intraday trade on Wednesday for the first time since May 2009, after JPMorgan’s Global All-Industry Output Index showed global business growth had hit its slowest pace in more than a year at the end of 2014.
The index, produced with Markit, dropped to a 14-month low of 52.3 in December, compared with 53.1 in November, as expansion in both manufacturing and services industries slowed.
Fears that the oil price plunge were stoking deflation in Europe, with some analysts expecting the first annual fall in consumer price inflation in December in euro zone, and continued deflation in Japan pointed that demand recovery was still far away in these nations. Expectations that China’s economic expansion in 2014 may have hit the lowest since 1990 and the absence of any strong signal to boost the economy meant demand in the world’s second-largest energy consumer was unlikely to pick up anytime soon.
In choppy trade, brent crude futures declined to as low as $49.66 before clawing back to $50.85 by 1156 GMT, still down 25 cents and marking an over 11% fall in the new year. The last time brent crude oil closed below $50 per barrel was on April 29, 2009, although the level was breached in intraday trade in May that year as well. Having hit $46.83 earlier in the session, their lowest since April 2009, US crude futures gained 4 cents to $47.97 a barrel by 1156 GMT.
Brent crude prices have lost roughly 54% since last January in the absence of any signs of a cut in production by the Opec even when the global market was already awash with supplies. While the US have piled up the most stocks since at least 1982, Russia’s oil production averaged 10.58 million barrels per day in 2014 —the highest in the post-Soviet era — while monthly exports by Iraq in December scaled their loftiest since 1980. The trimming of crude oil forecast price for 2015 by Citigroup and political uncertainties in Greece just aggravated the fall in crude oil prices.
The latest Citigroup report has forecast global brent oil price could average $63 a barrel in 2015, down from its earlier projection of $80, while the US benchmark could average $55 a barrel this year. Moreover, the report said there was a 30% likelihood that Brent could average even $55 a barrel. Last month, even Morgan Stanley forecast that in the worst worst-case scenario, brent crude could drop to as low as $43 a barrel in the second quarter of 2015.
Although King Abdullah of Saudi Arabia said this week his country would deal with the challenge posed by lower oil prices “with a firm will”, analysts believe Opec producers seemed to be awaiting the hedging period of US shale producers to end so that their American competitors were fully exposed to the damaging impact of the drop in prices and cut output themselves.
However, Opec’s calculations might not work even though many shale producers had hedged until the end of 2014 and some until December this year because these hedges were a moving target.
BofA ML sees Brent at $40/bbl Bank of America Merrill Lynch said Brent prices could reach $40 per barrel in the near term, leaving producers, including Saudi Arabia, with no alternative but to cut output. “We see a growing risk of WTI and Brent falling to $35 and $40 per barrel near-term to force either non-Opec producers or Saudi to cut,” the bank said in a research note on Tuesday.