Crude Oil Takes Another Major Hit

Crude oil continued to search for a bottom falling below the $83 price level on Tuesday only to regain 18 cents in the Asian session Wednesday. WTI is currently trading at 82.03 with negative pressure. Brent oil gained 27 cents to reach 85.98. The spread between Brent and WTI widened to close to $4.00.  Gasoline continued to decline on the back of oil declines. Gasoline is trading at 2.1846. The dollar gained as signs of global weakness drove investors toward the relative strength of the U.S. economy, while West Texas Intermediate oil was little changed following its biggest drop in two years. The US dollar climbed back over the 86 level as its cross currencies all traded on a negative bias.   The German government cut its growth forecasts, euro zone industrial production fell, and Fitch warned it may cut France’s credit ratings, saying the outlook for the country’s economy had deteriorated.  Those factors added to worries about global growth at a time when the U.S. Federal Reserve is unwinding its massive stimulus program.

U.S. crude bounced slightly after posting its biggest percentage loss in about two years overnight on a downgrade in global oil consumption forecasts, projections for another big boost in shale oil and reluctance by OPEC members to cut output. The rout in world crude markets has gained momentum and may not stop as OPEC members are showing little willingness to cede market share to North American oil suppliers in the face of slowing global demand.

Global producers face the threat of a nasty price war that could drive prices down to levels not seen since the depths of the 2009 recession, some analysts warned Tuesday. Major exporters such as Saudi Arabia and Iran have so far not been willing to cut supply to defend prices, while Libya is boosting production that had been derailed by civil war among militias. In a report issued yesterday the IEA cut its demand forecast for the third straight month. Annual demand growth is now expected to hit 700,000-barrels per day this year, down from 1.1-million the IEA forecast in spring. In contrast, global production was up by 910,000 barrels a day in September alone, and stood at 2.8-million barrels per day higher last month than September 2013.

Saudi Arabia increased production last month and engaged in price war with Iraq to defend its market from African producers whose exports have been pushed out of North America due to booming production here and who are looking for a new home for their crude. The kingdom – which produces 9.7-million barrels per day – has so far dismissed calls for it to unilaterally cut production or accede to Venezuela’s call for an emergency meeting of the Organization of Petroleum Exporting Countries. Iran, who usually supports stronger prices, has down played concerns about lower prices, noting that a rising U.S. dollar has offset the pain for many producers. The cartel is scheduled to meet at the end of November. Many cartel members are offsetting the decline in profits with increased production.