NEW YORK: Benchmark Brent broke below US$70 (RM234.25) a barrel yesterday as US crude tumbled 10% in its biggest one-day drop in more than five years, as OPEC’s decision not to cut output sent oil traders and analysts scurrying to find a new trading floor.
“I see little reason to buy oil now. I think people are either going to drive it down further or just let the market collapse,” said Tariq Zahir, managing member at Tyche Capital Advisors in Hollow Way, New York.
US West Texas Intermediate (WTI) light crude settled down US$7.54 at US$66.15 a barrel, and fell further post-settlement, reaching a four-year low of US$65.69. The last time the market lost 10% in a day was in March 2009.
North Sea Brent finished down US$2.43, or 3.3%, at US$70.15. It fell to as low as US$69.78 on the day, a bottom since May 2010.
Brent also finished down 18% for November for a fifth straight month of declines, or the longest losing streak since the 2008-2009 financial crisis.
Since June, Brent has given up about 40% of its value, falling from above US$115, as increasing US shale oil output helped create a glut amid sluggish global growth.
Yesterday’s sell-off culminated a stunning 24 hours on global crude markets, in near free fall after Saudi Arabia blocked calls from poorer members of the Organisation of the Petroleum Exporting Countries to reduce production.
With US markets officially closed for Thursday’s Thanksgiving holiday, WTI went down about 8% in electronic trading overnight.
Losses resumed when the New York Mercantile Exchange reopened, with US crude capitulating just before Friday’s close.
The risk flight in oil extended to the stock market, with energy shares on Wall Street taking a hammering despite the broader market closing up for a sixth straight week.
Shares of shale energy firms saw outsized declines, as US$70 oil was considered a level at which shale drilling became unprofitable. Denbury Resources, QEP Resources and Newfield Exploration all lost more than 15%.
“The message from OPEC was fairly clear – we are not hurting yet because we are the lowest cost producers,” said Iain Armstrong, oil and gas analyst at wealth management firm Brewin Dolphin in London.
“It is a question of who blinks first – OPEC or the US shale producers. The longer the oil price stays at these levels the greater chance a US shale producer will go under. But it will take time.”
Saudi Arabia’s oil minister told fellow OPEC members on Thursday they must combat the US shale oil boom, arguing against cutting crude output in order to depress prices and undermine the profitability of North American producers.
Traders said if US crude took out the May 2010 low of US$64.24, it could technically be headed for a test below US$60, toward the low of US$58.32 set on July 2009.
“WTI could certainly be down a couple of dollars more next week, and test newer lows from there,” said John Kilduff, partner at energy hedge fund Again Capital in New York.
Shale companies aside, shares of oil major Exxon Mobil Corp fell more than 4% to below US$91, while Chevron Corp lost about 5% to under US$109.
Activity in the options on the Energy Select Sector SPDR Exchange-Traded Fund XLE.P exploded as traders who had bet on a drop in the ETF scrambled to book hefty profits after the OPEC decision.
Russia’s most powerful oil official Igor Sechin said oil prices could hit US$60 or below by the end of the first half of next year. Options market data show speculators betting on US$65 Brent by early next year.
Goldman Sachs said US$60 Brent oil was possible but not sustainable and that WTI in a US$70-$75 range could prompt US producers to reduce capital expenditure, or drilling.
For next year, BNP Paribas cuts its Brent forecast by US$20 to $77, and WTI by US$18 to US$70.
“The market is looking for a new paradigm, a new range to settle into. Where that is, is anybody’s guess,” said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt.