guardian NEW YORK — US West Texas Intermediate crude plunged into a bear market yesterday, sinking another 2.2 per cent to settle at a nine-month low of US$43.23 a barrel, down US$0.97 to the weakest settlement since September 16.
The sell-off leaves oil down 22 per cent from early January, eclipsing the 20 per cent needed to qualify for a bear market.
The big fear gripping the energy markets is that the world continues to have too much oil, despite the deal between OPEC and Russia to pump less.
If anything, the supply glut could be deepened by emboldened US shale producers that have ramped up output in recent months.
“There is this bearish sentiment building into the market over what’s happening in the U.S. There’s a lot of concern the U.S. could offset OPEC’s production cuts,” said Jenna Delaney, senior oil analyst at S&P Global Platts.
The oil worries spread to Wall Street as energy stocks, already the biggest losers this year, took another hit on Tuesday.
Prices took the fresh leg lower on new signs of rising output from Nigeria and Libya, the two OPEC members exempt from a deal to cut production.
Output from the 14-member exporter group ticked higher in May due to rising production in Nigeria, Libya and Iraq, raising concerns about OPEC’s effort to shrink global stockpiles of crude oil. OPEC and other producers have committed to keeping 1.8 million barrels a day off the market through March.
Libya’s oil production rose more than 50,000 barrels per day to 885,000 bpd, a Libyan source told Reuters. Meanwhile, exports of Nigeria’s benchmark Bonny Light crude oil are set to rise by 62,000 barrels per day in August, Reuters reported.
Oil prices are “most definitely” heading to $40 a barrel and will likely dip into the upper $30s, John Kilduff, founding partner at energy hedge fund Again Capital, told CNBC’s “Squawk Box” yesterday.
The market is turning lower in part on tanker-tracking data showing unsold crude oil cargoes from Nigeria, he said. U.S. production is also a concern because American drillers locked in prices for future delivery, and so they’ll keep pumping even as near-term prices fall, according to Kilduff.
The price of oil has been sloshing between US$40 and US$55 per barrel for much of the last year, down from a peak of more than US$110 in the summer of 2013. Drillers have received much better at pulling oil from the ground, which has helped supplies to balloon and correspondingly weighed on prices. Many oil-producing countries have banded together to cut production in hopes of limiting supplies, but analysts are skeptical about how much they can influence prices.
One of the main reasons for the stock market’s climbing to record after record this year has been the resurgence in profit growth for big companies, and the energy sector is expected to play a leading role in that. Analysts forecast energy companies in the S&P 500 will report better than 300 per cent growth in their earnings per share this year. But if the price of oil keeps dropping, that’s at risk.
John Manley, chief equity strategist at Wells Fargo Funds Management, is still optimistic that expectations for earnings across the market can keep rising. Lower oil prices would undercut profits for energy stocks, but they should also help other industries that will be paying lower fuel bills. And as long as profits continue to rise, Manley says stocks can too.
“Earnings are starting to re-accelerate,” he said. “It may stop tomorrow, and if it does, well, I’ll change my mind tomorrow. But right now, earnings are growing.”