Crude Oil Dips Below the $30 Sending Shock Through The Markets

Crude oil prices fell below the $30 level sending shocks through the global markets.  In the Asian session on Tuesday oil prices traded in the green as buyer took advantage of the lower dollar and the drop in oil prices to buy up the energy commodity. WTI is at 30.10 up by 41 cents climbing out of the $29 price level. Brent oil added 18 cents to reach 33.06. The worldwide oil glut that fueled crude’s decline to a 12-year low will shift to a deficit as output falls and a new bull market begins before the year is out, Goldman Sachs Group Inc. said in January. U.S. production will drop by 620,000 barrels a day, or about 7 percent, from the first quarter to the fourth, according to the Energy Information Administration.

Low prices are also spurring greater efficiency, according to IHS. Operating costs on a per barrel basis declined about 35 percent last year in North America and have dropped about 20 percent globally, according to the consultant. Crude output from North Dakota rose through most of last year and some producers in the Permian Basin in western Texas can break-even drilling oil at $35 a barrel, he said.

Shale patches in the U.S. are pumping out more oil and gas than the government previously thought, according to the EIA’s Drilling Productivity Report released Monday. The agency predicts the seven major formations to produce 5.02 million barrels a day in February, up from last month’s forecast of 4.83 million a day.

Right now oil prices are low as production from both state-owned oil companies and independent shale producers — who have both largely been funded by debt over the last several years with most of this investing done while prices were about triple today’s prices — continues to flood an already oversupplied market.

If a company were financed mostly by equity, for example, it might slow production to keep earnings per share afloat or push forward with selling oil at lower prices and leaving fewer earnings (or even losses) for its equity investors. The number of companies at risk is more than twice the 60 producers that have already filed for bankruptcy. A further shake out would help stimulate deals that have been on hold because buyers and sellers have disagreed on asset values.

Oil has collapsed about 70 percent over the past two years as U.S. shale producers boosted output and the Organization of Petroleum Exporting Countries flooded the market with crude to drive out higher-cost suppliers. More bankruptcies would be one signal that energy prices have reached a bottom and would help kick off deals for the $230 billion worth of oil and gas assets currently up for sale.

Prices on Monday were hit by a drop in US equity markets amid persistent fears about the global economic slowdown. But on Tuesday, oil market traders ignored a 5-percent drop in Japan’s Nikkei. Many Asian markets are closed for Lunar New Year holidays.

The US dollar fell against the Japanese yen as sentiment towards most risk assets turned bearish amid concerns about banking stability. A declining dollar makes oil prices cheaper because most trade is denominated in the greenback, potentially spurring demand.

Still, the glut in world oil markets is unlikely to abate soon, with a Reuters survey showing US crude stocks likely rose by 3.9 million barrels in the week ended Feb. 5.

Industry group American Petroleum Institute on Tuesday releases its weekly inventory reports followed by official numbers from the US government’s Energy Information Administration on Wednesday.