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Crude oil nears 7-year low, analysts expect more worries ahead

business Updated: Dec 08, 2015 00:08 IST
Crude oil

File photo of an oil refinery under construction.(HT Photo)

Crude oil futures tumbled to their lowest in nearly seven years on Monday after OPEC failed to address a growing supply glut, while a stronger dollar made it more expensive to hold crude positions.

Brent futures fell $1.65 to $41.35, after sliding to$41.20, their lowest since March 2009. US crude futures were down $1.80 at $38.17 a barrel. Its session low of $37.96 was barely above 6-1/2 year lows of $37.75 struck in August.

A meeting of the Organisation of the Petroleum Exporting Countries’ (OPEC) on Friday ended without an agreement to lower oil production. Oil ministers dropped any reference to the group’s output ceiling, highlighting disagreement among members about how to accommodate Iranian barrels once Western sanctions are lifted.

Investors are betting on the oil price staying lower for even longer after OPEC’s decision to ditch a formal production ceiling. This could possibly harm the ability of US shale producers, among the casualties of OPEC’s strategy of pumping hard to retain market share, to lock in profitable prices for future deliveries.

“Oil is going to make lower lows for the foreseeable future and, in terms of market reaction post-OPEC, I’m not surprised, but it does leave the door open for prices to fall,” Gain Capital analyst Fawad Razaqzada said.

Analysts at Barclays said the lack of an OPEC production target in its written announcement was a sign of discord.

OPEC’s output of more than 30 million barrels per day (bpd) has compounded an oil glut, pushing production of 0.5 million to 2 million bpd beyond demand.

“It means that there is a loss of confidence in the market after OPEC, and people expect low prices to last longer”, said Oystein Berentsen, MD of crude oil at Strong Petroleum in Singapore.

“Hence the back of the curve will be under pressure from producer hedging via selling the back of the curve to limit loss or lock in a small profit to reduce risk.”

Goldman Sachs said after the OPEC meeting that it expected oil prices to remain “lower for longer,” with a risk that oil prices could fall as low as $20 per barrel.