Oil prices dropped to the lowest level this year as the market searches to find the bottom, while bearish sentiment will carry over throughout next year, according to analysts.
Brent crude, the international benchmark, this week dipped to its lowest level this year at US$43 per barrel amid fears of a rising over-supply from Opec and non-Opec members.
“The market is searching for a floor, which some thought would be $45 per barrel, but others would say that the next resistance point is $42.50,” said Eugene Lindell, an oil market analyst at JBC Energy consultants.
Just when speculators’ confidence over oil will return depends on what exactly they believe the bottom to be. JBC Energy, based in Austria, said the floating storage is actually increasing, which is causing concern. “When we discuss the market rebounding, we are no longer talking about recovering to $60 – we’re talking about hitting $50 or slightly above,” Mr Lindell said.
This period typically sees higher amount of stock, but currently there are about 10 to 15 very large crude carriers added to global storage of crude. Part of this is coming from Opec members, Nigeria and Libya, who are exempt from production cuts. Nigeria has added more than 600,000 barrels per day (bpd) to its output compared to last August. “That’s a big deal and the market has to somehow swallow that,” he said.
In addition, Libya is pushing producing around 900,000 bpd with aspirations to hit the 1 million bpd mark – which basically undermines the Opec production deal. This coupled with the ramp up in rigs to tap more shale oil in the United States is continuing bearish sentiments for the next year.
“Everyone in the market believes that next year is going to be tough, it’s just a question of how tough it is,” said Mr Lindell.
He said the fact that the forward curve had shifted into contango throughout next year is indicative that market prices have realised there is a longer-term problem.
Frankfurt-based Commerzbank said in a client report the depressed view of the market is a sign of relative weakness, which has set a downward spiral in motion. “Sentiment on the oil market has become so gloomy that even news that would normally support prices is unable to spark any noticeable recovery,” the bank said.