Oil's slump hits 6-year low

Worldwide glut has analysts fearing drop to $30 a barrel

Oil prices tumbled to a six-year low Wednesday on signs a global glut will persist.

West Texas Intermediate crude fell 4.3 percent to settle at $40.80 a barrel on the New York Mercantile Exchange after a government report showed that U.S. crude inventories unexpectedly rose. Brent crude, a benchmark for much of the world's oil, fell 3.4 percent to close at $47.16 a barrel on London's ICE Futures Exchange.

The dip raised a question among industry experts: How low will oil go?

According to analysts and traders, the answer is about $30 a barrel, a level last seen during the 2008 financial crisis. That would be more bad news for energy companies struggling with a year-long price slump.

"For oil producers this is a very bad situation," said Phil Flynn, an energy analyst with Price Futures Group. "A lot of oil producers thought that prices had stabilized and they kind of looked like they were putting rigs back online, but if prices continue to fall, this could hurt their profitability."

Since peaking this year in June, oil prices have plunged more than 30 percent on signs that there is still an abundant amount of crude worldwide. A year ago, oil was selling for more than $100 a barrel.

"The market is very concerned about a glut in supplies in the global market right now," Flynn said.

U.S. oil supplies rose 2.6 million barrels to 456.2 million barrels during the week that ended Friday, according to a report Wednesday by the U.S. Energy Information Administration. Analysts expected stockpiles to drop by 820,000 barrels, Bloomberg News reported. A barrel of oil contains 42 gallons.

"U.S. production -- which was actually surprising -- did not substantially go down," said Tariq Zahir, a managing member of Tyche Capital Advisors LLC.

"You basically have a price war going on now. Everyone is going to be fighting for market share."

The crude price rout started about a year ago as a result of an oversupplied market and weak demand. U.S. oil production from shale plays continues to be strong, despite spending and rig cuts. Some producers added drilling rigs when oil prices rebounded slightly in the spring.

Record production from the Organization of the Petroleum Exporting Countries is adding to the glut. Led by Saudi Arabia, the cartel has maintained output in a move attributed to an effort to maintain market share.

There are also expectations that Iranian oil could soon flood the market. Iran said it will quickly move to export oil if sanctions are lifted under the nuclear agreement between Iran and six nations led by the United States.

Analysts say the oil market has been unbalanced because demand is weak. There are signs that the Chinese economy is slowing, and U.S. demand for gasoline will taper off with the end of summer travel, analysts said.

The average price of gasoline in Arkansas was $2.34 a gallon Wednesday, down from $2.46 a month ago. The national average was $2.66 a gallon, compared with $2.76 a month ago, according to AAA's daily fuel gauge report. Analysts have said they expect prices at the pump to dip below $2 by the end of the year.

The domestic oil supply report by the energy administration showed refineries processed about 16.8 million barrels per day last week, a drop of 254,000 barrels from the previous week. Refinery utilization dropped 1 percent. To analysts, both are signs that demand is slowing.

The drop in refinery production, and ultimately the increase in crude stores, occurred because several refineries are undergoing unplanned maintenance, Zahir said.

But, he said, "I do think this is the start of a trend we see going forward."

Motivated by some of the cheapest gasoline prices in years, Americans are driving more this summer. But that will taper off when summer ends and refineries pause production in two or three weeks for maintenance and to switch to cheaper winter blend fuel, Zahir said.

"We're way past the peak of driving season," he said. "Demand is definitely in our opinion going to come down."

With the market continuing to be oversupplied throughout 2015, it is reasonable to expect oil prices to fall further, analysts said.

A report by Citigroup Inc. said it "is a conceivable reality" that the oil prices could fall to $32.40 a barrel, the low price during the 2008 financial crisis, Bloomberg News reported.

Zahir also predicted oil near $30 a barrel.

"It could happen the end of [Wednesday] or take a week or week and a half," he said. "Lower prices are here to stay. It's going to be hard for [a price rebound] even if demand comes back because you did not have shale 10 years ago."

The continued weakening in oil prices means more spending cuts and layoffs for energy companies, Flynn said.

Most oil companies have reduced spending, drilling rigs and workforces this year. Murphy Oil has cut spending by about 30 percent and said it reduced its workforce by 7 percent during the second quarter of 2015.

"For all oil companies, including Murphy, oil at $30 would represent another drastic change ... we would expect to see new [capital spending] announcements," Luana Siegfried, an analyst with Raymond James and Associates, said in an email.

"Bearing in mind Murphy's above-average degree of operational risk, particularly the historically unpredictable metrics from Malaysia, and in the context of significant cash flow outspending, the scenario for [Murphy] would be a tense one," she said.

A spokesman for Murphy Oil did not respond Wednesday to messages requesting comment.

There are some U.S. producers who will remain profitable with oil at $45 or $50 a barrel, but some, especially smaller firms, will struggle to stay in business, analysts said.

"Companies like Murphy, they are going to have a bad year or two while they adjust their costs in response to prices," said Michael Lynch, president of Strategic Energy and Economic Research Inc. "Mostly they will survive."

A Section on 08/20/2015

Upcoming Events