On Wednesday, the daily basket price of OPEC-produced crudes produced slid to $29.71 a barrel, down from $31.21 on Tuesday – marking the lowest level recorded since February 2004, according to data compiled by Bloomberg. The price of oil slid below $30 in reaction to the turmoil and selloff in China’s markets, which put additional pressure on global commodities.
Bloomberg noted that West Texas Intermediate (WTI), the US benchmark, has started off 2016 as its worst year so far – with China’s market turmoil putting downward pressure on other benchmarks, as well, which are all currently at very low levels. WTI and Brent crude found support at $32/barrel, while Opec's oil basket continued to slump reaching $27.85/b on Thursday.
In its December meeting in Vienna, OPEC left its production strategy unchanged – meaning that OPEC is still not putting any breaks on its production levels, effectively keeping oil prices at lower levels in the wake of the current global oversupply of crude oil. OPEC’s biggest producer, Saudi Arabia, has promoted the group’s strategy of letting global prices fall in order to push rival US shale oil producers out of the market. OPEC’s stance is not only hurting US producers, but also smaller OPEC members, such as Venezuela, which, with oil accounting for 95% of its exports, is experiencing a deep recession.
Ole Hansen, head of commodity strategy at Saxo Bank, commented that the current global oversupply is only expected to get worse this quarter before possibly improving later this year, especially with the turmoil in the Chinese markets (fuelled in part by Chinese demand failing to meet expectations) adding to the downward pressure of the crude oil glut. Geopolitical tension between Saudi Arabia and Iran, and Iran’s increased oil production following the lifting of Western sanctions, are also adding to oil price woes.
Hansen also noted that US inventory levels are more than 100 million barrels above the five-year average, and storage facilities, which are approaching their capacity limits, may soon have to push oil away at even lower prices. These persistent lower oil prices will continue to force US and Canadian producers to slow production.
The new year is shaping up to be a rocky road to travel, since a recovery won’t take place until the oil market is convinced that further losses can be avoided. The global oil industry is watching closely for any glimmer of market recovery. After a choppy day of trading on Friday, Chinese markets closed higher, with the Shanghai Composite closing 2% up, and the Shenzhen Composite adding 1.1%. On Friday morning, oil prices also recovered slightly, trading 1.3% up at around $33.7 per barrel.