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GLOBAL OIL PRICE PLUNGING BELOW US$60 A BARREL.

Byline: SHABBIR H. KAZMI

Reportedly benchmark US oil prices slipped extended below US$58 a barrel on Friday after the International Energy Agency (IEA) cut its global demand forecast for the fourth time in five months. The IEA reduced its estimate for oil demand growth in 2015 by 230000 barrels a day the agency said in a report released last week. The glut has been created manly because US output already at a three-decade high will continue to rise in 2015.

West Texas Intermediate crude (WTI) capped a weekly decline of 12 percent while Brent lost 10 percent. In the short term supply glut is likely to continue as further inventory builds putting further pressure on oil prices. Both benchmarks have collapsed about 20 percent since the Organization of Petroleum Exporting Countries (OPEC) agreed to leave its production quota unchanged at 30 million barrels a day. Saudi Arabia Iraq and Kuwait the group's three biggest members this month deepened discounts on shipments to Asia bolstering speculation that they're fighting for market share.

European benchmark Brent for January settlement slips by 2.9 percent to US$61.85 at London-based ICE Futures Europe exchange that was the lowest level since July 2009. Prices are down 44 percent in 2014. The IEA cut projections for the amount of crude OPEC will need to provide next year by 300000 barrels a day to 28.9 million. OPEC gave the same forecast the lowest since 2003 in its monthly report on 10th December.

Some of the analysts are of the view that prices will remain low in the near future. They expect Saudis don't want to make any kind of cut whatsoever. Saudi Arabia's stance is often project that the largest oil producer has initiated a price war. This perception is totally incorrect because the glut has been created by shale oil production that has made the country the biggest producer of oil in the world. While there is pressure on OPEC to cut production US wishes to continue to produce at the present rate.

The US oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing which has unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota. Low oil prices are likely to slow US shale production; it is only question of time sooner than later the world may see slowdown in US production if the price stays where it is at present.

There are reports that US oil drillers stopped the most rigs in almost two years this week. Rigs targeting oil dropped by 29 to 1546 the lowest level since June and the biggest decline since December 2012 Baker Hughes Inc. (BHI) said on its website as they face oil trading below $60 a barrel and escalating competition from suppliers abroad.

According to a Bloomberg as OPEC resists calls to cut output US producers including ConocoPhillips and Oasis Petroleum Inc. have curbed spending. Chevron Corp has put its annual capital spending plan on hold until next year. Rigs targeting US oil are sliding from a record 1609 after global prices dropped to US$50/barrel threatening to slow the shale-drilling boom that has propelled domestic production to the highest level in three decades.

ConocoPhillips said it would cut spending next year by about 20 percent. The Houston-based company is deferring investment in North American plays including the Permian Basin of Texas and New Mexico and the Niobrara formation in Colorado. Oasis an exploration and production company based in Houston said Dec. 10 that it's cutting 2015 spending 44 percent.

Even as producers cut budgets and lay down rigs domestic production is surging with the yield from new wells in shale formations including North Dakota's Bakken and Texas's Eagle Ford projected to reach records next month Energy Information Administration data show.

Oil production probably won't drop until mid-2015 James Williams president of energy research company WTRG Economics in London Arkansas said. "US shale is unstoppable at US$100 a barrel but it's clearly stoppable at US$60" he said.

The international benchmark North Sea Brent oil and its US counterpart West Texas Intermediate crude are trading at their lowest levels since 2009. This may force US oil rigs operating to fall below 1100 for the first time in three years.

Since early 2010 energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero according to Deutsche Bank AG. With oil prices plunging investors are questioning the ability of some issuers to meet their debt obligations. There are predictions that the default rate for energy junk bonds will double to eight percent next year.

The Fed's decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns raising concern that risks were being overlooked. A report from Moody's Investors Service this week found that investor protections in corporate debt are at an all-time low while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

"It's been super cheap" for energy companies to obtain financing over the past five years said Brian Gibbons a senior analyst for oil and gas at CreditSights in New York. Now companies with ratings of B or below are "virtually shut out of the market" and will have to "rely on a combination of asset sales" and their credit lines he said.

The Fed's three rounds of bond buying were a gift to small companies in the capital-intensive energy industry that needed cheap borrowing costs to thrive. Quantitative easing has been one of the keys to the fast breakneck pace of the growth in US oil production which required abundant capital.

One of those to take advantage was Energy XXI an oil and gas explorer which has raised more than $2 billion in the bond market in the past four years. The Houston-based company's US$750 million of 9.25 percent notes issued in December 2010 have tumbled to 64 cents on the dollar from 106.3 cents in September.

Energy XXI got its lenders in August to waive a potential violation of its credit agreement because its debt had risen relative to its earnings according to a regulatory filing. In September lenders agreed to increase the amount of leverage allowed.

The debt rout is one of the latest examples of a boom and bust in US markets as unprecedented Fed stimulus fuels a hunt for yield. The fallout has been limited so far yet the longer the Fed holds its benchmark lending rate near zero the greater the risk of more consequential bubbles according to former Fed governor Jeremy Stein.

Deutsche Bank analysts predicted in early December that about a third of companies rated B or CCC may be unable to meet their obligations should oil prices drop to $55 a barrel. "If you keep oil prices low enough for long enough there is a pretty good case that some of the weakest issuers in the high-yield space will run into cash-flow issues" Oleg Melentyev a New York-based credit strategist at Deutsche Bank said in a telephone interview.
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Publication:Pakistan & Gulf Economist
Geographic Code:1U7TX
Date:Dec 21, 2014
Words:1204
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