Crude Oil Touches Newer Low Sending Energy Stocks Tumbling

In commodities yesterday crude oil held to gains after bouncing from 6-1/2 year lows. A weaker dollar and the formation of the first hurricane of the 2015 Atlantic season supported US crude , which stood little changed at 41.10 after touching the multi-year low of 40.21 on Thursday. Friday morning traders moved away from oil again, sending it down 47 cents to 40.86 hitting a new low.  Brent oil diverged and gained 5 cents to trade at 46.13.

Oil prices tumbled on Friday after a survey showed Chinese factories contracted at their fastest pace since the depth of the global financial crisis in 2009, sending investors scurrying to the safety of bonds and gold. Oil prices and emerging market assets took a hammering, as fears of a China-led deceleration in global growth gripped markets. The recent plunge signified a weakening Chinese economy in the view of global investors, raising prospects of slower inflation, weaker demand for commodities and a currency war after Beijing devalued the yuan last week.

Amid high uncertainty in the global oil market, the Energy Information Administration has lowered crude oil price forecasts in the Short-Term Energy Outlook (STEO), expecting West Texas Intermediate (WTI) prices to average $49 per barrel in 2015 and $54 per barrel in 2016.

The price of Organization of Petroleum Exporting Countries (OPEC) basket of 12 crudes had earlier dropped to $ 45.77. This is far less than the adopted $53 per barrel as the 2015 budget oil price benchmark. According to the report released on Wednesday, concerns over the pace of economic growth in emerging markets, continuing supply growth, increases in global liquids inventories, and the possibility of increasing volumes of Iranian crude oil entering the market contributed to the changed forecast.

It noted that EIA’s updated projection remains subject to significant uncertainties: the pace and volume at which Iranian oil reenters the market, the strength of oil consumption growth, and the responsiveness of non-OPEC production to low oil prices.

It noted that the 95 per cent confidence interval for market expectations widens over time, with lower and upper limits of $27 per barrel and $103 per barrel for prices in December 2016. “Implied volatility now averages 37 per cent, more than double the implied volatility average this time last year.

The IEA said that global oil supply increased by 550,000 barrels a day in June to 96.6 million barrel per day (mbd), up 3.1m bpd from the same month a year ago. “The market’s ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day,” the IEA said.

For many oil and natural gas production companies, their most valuable assets are the oil and natural gas in the ground. The companies may plan to spend decades producing the commodities, but in the meantime, they use accounting formulas to determine what those in-place commodities are worth today.

As the price of oil fell more than 40 percent of its previous level, the worth of those in-ground assets falls, as well. At first, companies hoped the commodity price would recover quickly without causing too many troubles with their accounting. But as the price drop has become more extended, companies have to write down the value of their biggest assets.