Dropping Oil Prices Send Shockwaves Through Energy Sector

Yves here. Commodity prices have been screaming deflation for some time, but oil prices remained stubbornly resistant…until now. In a period of mere weeks, oil prices have fallen considerably and the slide continues. Today, for instance, Brent fell by $1 this morning despite stronger-than-expected trade data out of China due to reports that OPEC won’t cut production till oil prices hit $80 a barrel. Note that that news hit after this post was published, and represents a much lower price level than analysts assumed. So the outlook is even gloomier than this downbeat piece indicates.

In addition, as this post discusses, the plunge in oil prices has an impact on other energy prices. Or perhaps to put it another way, the way deteriorating economic fundamentals are whacking oil prices clearly has ramifications for other fuel products.

By Nick Cunningham, a Washington DC-based writer on energy and environmental issues. Originally published at Oil Price

Energy stocks have taken a beating so far in October as commodity prices continue to deteriorate.

A wave of bad news has hit the commodities sector. A weakening global economy, a surplus in oil supplies and a strengthening U.S. dollar have combined to send oil prices lower in recent weeks.

On Oct. 9, the slide continued when Brent crude dropped below $90 per barrel for the first time in more than two years.

Poor economic data from Germany raised fears that a renewed European recession could be on the horizon. The S&P 500 lost 2 percent on Oct. 9, and the markets have experienced some of the worst volatility so far this year. The International Monetary Fund (IMF) also revised downwards its projection for global economic growth in 2014 and 2015, warning that “global growth is still mediocre.”

China’s oil demand remains weaker than it has been in years. To a certain extent, China’s oil imports have been artificially elevated as it has diverted oil into its strategic stockpile. Oil imports could soften as stockpiles fill up. China even posted a decline in oil imports for the month of July.

Elsewhere in Asia, demand is also tepid. Driven by a desire to boost budgets by cutting spending, countries like Indonesia, Vietnam, Thailand, India and Malaysia are all trimming fuel subsidies, according to The Wall Street Journal. That has sent fuel prices up 10 percent in Malaysia and 23 percent in Indonesia, for example. India’s decision to reduce subsidies has pushed demand growth for diesel to near zero for the year, after annual growth rates of 6 to 11 percent in the past.

Meanwhile, oil supplies continue to rise. OPEC production for September hit its highest level in almost two years. Libya has lifted its oil production to 900,000 barrels per day, up from just 200,000 barrels per day in June. And Saudi Arabia has yet to significantly cut production.

Separately, the U.S. Energy Information Administration (EIA) reported higher than expected crude oil in inventories as refineries cut purchases and close for maintenance. Higher global supplies are pushing down prices.

The U.S. dollar also continues to strengthen, with the currency recently hitting a two-year high with the euro. A stronger dollar tends to weaken oil prices.

With oil prices hitting multi-year lows, the markets wiped out energy stocks. On Oct. 9, ExxonMobil lost 2.95 percent; Chevron lost 2.92 percent; BP was down 2.69 percent, and ConocoPhillips was off 3.20 percent.

But it wasn’t just oil companies. The markets continue to wallop the coal sector. Arch Coal lost 7.23 percent of its value; Alpha Natural Resources lost 11.11 percent, and Peabody lost 9.22 percent. In addition to the broader economic malaise, the coal sector got an extra bit of bad news on Oct. 9 when China declared that it would reinstate tariffs on certain types of imported coal that were scrapped a decade ago. The tariffs threaten to slash coal imports and boost China’s domestic coal industry.

The one-day sell off was the stock market’s worst performance of 2014. It is unclear where the markets will go from here as there are no signs that the supply and demand picture will change significantly anytime soon.

But if oil prices drop any further, the bite will really set in. Although specifics differ across companies and regions, some oil companies could begin to trim spending on exploration if oil prices drop below $85 per barrel. That would eventually lead to lower oil production and bring prices back up to some equilibrium.

Alternatively, prices may soon drop lower than Saudi Arabia is willing to tolerate. In such a scenario, the world’s only real swing producer would accept lower output in order to see prices increase to its desired range – somewhere between $95 and $110 per barrel.

However, Riyadh has remained silent thus far on its next steps.

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    1. vlade

      There was a comment from Russian defence minister that with the oil price down and the embargo it will be impossible to maintain the defence spending growth. Since that’s the one Mr. Putin really wants (and the comment was angrily reacted to by a russian VP), you can bet that other areas are suffering already.

      1. rkka

        “There was a comment from Russian defence minister …”

        Finance minister, and he’s most likely a Westernizer…

        Russia is financially secure, and can spend on defense as she wishes. That’s what half a terabuck in the bank will do for you.

        Russia’s governmental external debt is microscopic, and most of the Russian government’s bills are in Rubles, so the Ruble decline along with a $ oil price decline leaves the Russian gvt’s financial position largely unchanged.

      1. timbers

        “oil below $80 will destroy the frackers economy, too..”

        Destroying oil exploration and prices and thereby possibly destroying fracking as well. As the main point might be to destroy Russia so Joe Biden’s son can frack eastern Ukraine, it might be similar to what U.S. did in Syria: arming ISIS to get rid of Assad last year followed by bombing ISIS and their U.S. made weapons to keep Assad this year. Bombing in circles.

    2. Jim Haygood

      Over the weekend, the cover story rationale has been polished:

      The Saudis now appear to be betting that a period of lower prices will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater.


      Lower prices today = higher revenue later. Yeah, right!

      Flooding the crude market is economic warfare, but the accepted convention is to claim technocratic objectives. Meanwhile the US (which undoubtedly has promised to compensate the Saudis) whistles and casually checks its watch, like the Umbrella Man at the JFK motorcade.

      1. susan the other

        Is it also possible, since the Saudis are compensating lower prices by larger quantities, that demanding purchase of oil be in larger quantities than the EZ has been ordering, that the deal between the US and the Saudis is for the US to buy Saudi oil at 80/barrel in large quantities as a wholesaler and ship them on to the EZ as needed? And that probably also amounts to a discount for the EZ from the good deal even the Russians were offering. Else why not just cut production?

      2. not_me

        We should fill the Strategic Reserve then or if full create another one.

        Btw, why is Saudi Arabia sacrosanct wrt to US aggression especially given 911?

        1. MyLessThanPrimeBeef

          China would be smart to load up on oil if this continues.

          Instead of holding Treasuries, and complaining about it, they can transfer some of them to the Saudis.

          If the US wants to war on Russia this way, China will not complain too much….may even postpone drilling in the South China Sea for a short while.

      3. Crazy Horse

        As the man in the Panama hat casually checks his watch for the timing of the next coup attempt against Venezuela. Tried it before but Chavez was a much more charismatic leader than Maduro and the timing wasn’t ripe for the Saudi’s to deploy the oil weapon with Russia as the intended target.

        I wonder if the Saudi’s realize that the real prize for the US is to capture the biggest proven oil field in the western hemisphere by installing an oligarch puppet government in place of the failed socialist one in Venezuela ? OPEC be damned— The US and Saudis would then hold all the cards.

  1. Gerard Pierce

    My first thought is to question whether there is any reality here. Two things that I note: Rapidly dropping gas prices just before an election has to have some effect – but I don’t know what. If there is some benefit in manipulating prices, then someone is manipulating prices. Secondly, in connection with sanctions that haven’t had much effect, a drop in crude price could put a lot of pressure on Putin.

    When I say I question reality, I remember that a few years ago some of the banksters were manipulating oil prices. Mr. Market apparently couldn’t tell the difference between a barrel that was in a barrel and one that had been deliberately left underground.

    Sometimes reality is weirder than we CAN imagine.

  2. vlade

    Can’t remember where it was, but I saw recently something saying that Saudis have less leverage than it seems here, since the price is now mostly driven by sweet light, not Saudi’s crude, so they would have to drop the price very agressively for it to matter.

    I do wonder how much is all this helped by ISIS exporting out oil dirt cheap (allegedly, they sell at about 10-20 USD per barrel, which if they sell at any size, could reasonably impact the market).

  3. ambrit

    Mr. Pierce nails it with his election time comment. With the Administration worried about retaining control of the senate, I expect the Feds to make some noises about all those refinery “maintenance” down days. Funny how this crude price drop gets somewhat offset by “maintenance” based restrictions in refined stock output. Journalism pundits don’t call this the “silly season” for nothing.

    1. abynormal

      Oct. 12 WSJ

      Days after slashing prices in Asia, Saudi Arabia is now making an aggressive push in the European oil market, traders say.

      The kingdom is taking the unusual step of asking buyers to commit to maximum shipments if they want to get its crude.

      “The Saudi push is not just in Asia. It’s a global phenomenon,” one oil trader said.

      1. vlade

        If you have a sweet-light geared kit, you’d have to spend reasonable cash to get it to process Saudi’s crude. So it would have to have large price advantage.. I’m not saying that Saudi’s won’t try, but the question is how much leverage they have. I’m not an oil-industry insider, so can’t really comment that much on it but would love to hear from somoene more qualified (than me or WSJ TBH).

        1. hunkerdown

          (My bona fides: I used to read The Oil Drum a lot…)

          Are there that many operating refineries left without reformers, what with most of the light sweet having gone up the stack already? It’s worth noting that European transportation largely runs on diesel, not gasoline; there may be more for them in crudes of middling gravity.

  4. joecostello

    $80 will certainly throw a wrench into the Shale Revolution, though if you’r not making money at $100, you wont be making money at $80, “We need more debt!” But what’s interesting is if they start slowing down what happens? Consider that right now, pretty much every three years they need to punch as many holes as they already have just to keep even, if you quit drilling new, production will start collapsing pretty quick, especially if done disorderly, interesting to see how this plays out.

    1. ambrit

      That would translate into a lot of idle equipment, no? Who manufactures that heavy equipment, and the spare parts for it? They should take a big hit and would almost certainly have to retrench. Since I believe most heavy equipment is leased, the banks who underwrite this trade would also take a big hit to their margins. So, some big manufacturing layoffs, and stressed banks. Throw in Legendary levels of leverage, and you have the ingredients for a Perfect Storm. Time to short Halliburton and Tidewater.

      1. abynormal

        my sentiments exactly. look at trannies…the globe is slow’n down hard. countries are hording and will begin feeding off their own inventories…boost in protectionism.
        also remember US credit growth has been in subprime auto sales…UGHHHH

      2. John Zelnicker

        Drill bits (and other equipment) by Baker Hughes. They even come in pink this month via Susan G Komen. :-/

    2. ian

      Having been employed in oilfield services in the 1980s (and laid off), I can tell you that when the cutoff comes, it can be pretty abrupt. I wonder how much lower the price can get before shale becomes a total loser.

  5. John

    Lower energy prices is what everyone should be cheering for. That generally means less demand and therefore less environmental damage. Lower food prices should also follow since food prices and energy have a bit of a correlation. The ag business is a big consumer of energy.

    Enjoy the respite because at some point prices will go back up. With a growing world population energy demand will only increase.

    1. McMike

      “Less demand.” Not sure about that. Seems it will lead to more demand, and less urgency to find something else.

      Environmentally speaking, the best thing to happen is for fossil energy to cost much much more.

      1. jrs

        less supply probably what was meant, and there probably will be less incentive to supply, so therefore less fracking maybe and if so less contaminated water etc. But on the demand side lower prices will probably mean less demand for conservation etc.. It’s why people suggest things like carbon taxes, higher price to reduce demand, transfer payments to the people to offset it, no higher income for the fossil fuel companies except to the extent they go non-carbon.

    2. Peppsi

      Yeah. Put the fucking frackers and drillers out of business, and let the banks take huge hits. I will take 3.50 gas over polluted groundwater. I will I will I will.

  6. Jim Haygood

    Sentiment is negative enough now that you could probably buy the energy sector, at what’s likely to be somewhere near a relative low. Fade the consensus.

  7. brooklinite

    Morning All,
    I personally believe that low priced crude would have the following implications :
    1) Shale, Fracking bust in North Dakota and Texas (Short shale boom, fracking companies. — This is a sure thing)
    2) Slow down for demand for heavy machinery (Short Heavy machinery companies – Possible opportunity)
    3) Low food prices for time being (Short Food companies – Time it right situation with food)
    4) Real estate might take a significant hit in Dubai and Saudi Arabia if their margins are low
    5) Real estate in North Dakota might be a concern.
    So far I see the above situations playing out in the near future. I summed up lots of above opinions into a precise points prioritized by the potential sequence of events playing out —


  8. Erick Borling

    > I WISH < it means less demand. It likely means hefty supplies. That's not worth a cheer, John.

  9. TheraP

    Fracking bust would also mean a bust in WI or wherever they are getting sand for fracking use.

    Also what happens to all that corn meant for ethanol mandated by some states to be added to gasoline?

    And maybe real estate for growing corn or mowing down hills of rock to make sand?

  10. ohmyheck

    From ZH, a few days ago:
    “Saudi Arabia to pressure Russia, Iran with price of oil
    Saudi Arabia plans to sell oil cheap for political reasons, one analyst says.
    To pressure Iran to limit its nuclear program, and to change Russia’s position on Syria, Riyadh will sell oil below the average spot price at $50 to $60 per barrel in the Asian markets and North America, says Rashid Abanmy, President of the Riyadh-based Saudi Arabia Oil Policies and Strategic Expectations Center. The marked decrease in the price of oil in the last three months, to $92 from $115 per barrel, was caused by Saudi Arabia, according to Abanmy.

    With oil demand declining, the ostensible reason for the price drop is to attract new clients, Abanmy said, but the real reason is political. Saudi Arabia wants to get Iran to limit its nuclear energy expansion, and to make Russia change its position of support for the Assad Regime in Syria. Both countries depend heavily on petroleum exports for revenue, and a lower oil price means less money coming in, Abanmy pointed out. The Gulf states will be less affected by the price drop, he added.”
    “Today’s Brent closing price: $90. Russia’s oil price budget for the period 2015-2017? $100. Which means much more “forced Brent liquidation” is in the cards in the coming weeks as America’s suddenly once again very strategic ally, Saudi Arabia, does everything in its power to break Putin.”


  11. kevinearick

    Columbus Day Hurricane Watch

    Gee Whiz, they can’t find good labor for $10/hr and $800/mo rent, a ratio of one instead of four, surprise.

    Don’t fight nature is a better rule of thumb than don’t fight the Fed, because all the latter can do is control a shrinking sub-system, with increasingly arbitrary complexity, employing duration mismatches that the resulting automatons think of as money; in other words, talk, always redefining the problem to suit themselves, in a search for something for nothing.

    If you are hunting the big wave, you want a hurricane, or better yet, a swarm of hurricanes. If you built your house in the wrong place, you don’t want a hurricane. Both factors affect the spacetime of hurricanes. The majority is always unprepared, in the wrong spacetime, attempting to rule out nature with derivatives, hiding in a box, assuming that collectivist human ‘power’ is more than trivial.

    If equality was more than a slogan, it would already be a given, and the business-card, back-of-an-envelope simpletons, doomed to repeat the past, have already been given the passive investment rotation. Just bet on noise, without the institutional overhead, if you seek increasingly worthless money.

    The empire is not about fiat, silver, bonds and stocks; it’s about Carney, Dimon, Gross and Blankfein, the global social networks of feudalism building artificial borders to control labor. Putin doesn’t need $60US oil, but those experiencing demographic collapse need $150US oil just to maintain dead inventory.

    There is more potential energy than the gatekeepers could ever dream of spending, and all current energy technologies are a bad joke. Einstein was a patent office boy, given an A on the Bell Curve of Best Business Practice at University, who was surprised that one objective-based politician was no different from another, not A Galileo, let alone a Leonardo.

    History tells you that 10% of your time effectively spent in the empire, at a ratio of four, will free 90% of your time, and there are an infinite number of paths not leading to Rome. Pick one. My wife knows more about economics than the monkeys and apes, and her interest is entirely casual.

    The critters build their technology in a clean room, expecting something other than financial repression choking themselves, when it fails in the real world and they spend all their remaining resources trying to prove otherwise. Humanism, an extension of gravity, does no work, by design, which has its uses. Where there is a free will, there is always a way.

    Don’t bring global city habits home and expect labor to take the resulting virus seriously. There is never a shortage of physical and intellectual commodities, and there is always a shortage of talent and skill, for a reason. Fascism, anxiety-ridden zombie consumers efficiently destroying the natural environment they depend upon, is self-adjusting.

    Feeding RE inflation with drought and moving to Las Vegas, to demand more public education, drinking bottled water and brushing with fluoride, is no reason to follow the herd. Funny, they have plenty of water for the loss-leading tourism/drug/entitlement economy, but no water for the real economy, and you are suppose to accept the resulting fascism as a given.

    Labor works, from and to nature, regardless of the latest empire monetary and fiscal fad, all noise. Define labor any way you want; an empire can always be shorted into itself. Recycling the lower middle class from place to place, as a replacement for labor, in an irrelevant negotiation among the upper middle class, only lasts so long, and the empire has run itself out of free will.

    The ignorant, jealous and greedy little critters got mad because I was charging $150/hr and free rent for 20 hrs/wk. How do you suppose they like me now, that the shoring under their economy is collapsing?

    The titration continues…tick, tock. You don’t have to do anything, but you might want to move forward, or not. Labor discounts away the empire, until it doesn’t, and things go boom. Always begin at the end, by letting the empire strangle itself, arguing over the lack of oxygen, living and dying by Family Law.

    Einstein didn’t invent nuclear energy any more than Columbus found the New World. All empires are myths, that manufactured majorities assume as a given, until they can’t.

  12. susan the other

    I’d like to think we are looking at the beginning of a century of environmentalism. Like the old saying about pennies, If we look after the environment the dollars will take care of themselves. Wouldn’t that be nice? So I just had a thought that perhaps this is the beginning… and I’m remembering an interesting thing about oil. The US has always protected its domestic oil capacity by using other people’s oil. We have national security fanatics (sometimes a good thing) who plan a century out – just to give us time to adjust. So we just jacked up the price of oil because (?) it was necessary to wildcat around, looking for shale, tar, and deepwater. And now? Well we either did find some stuff to exploit later, or we didn’t. I’m betting we did. In any event this behavior by us is nothing new. Ever since the late 70s we have been willing to use expensive Middle East oil to save our own. And I know about one first hand report right here in Utah that a big fat discovery of “high grade” oil was discovered somewhere in the mid part of the state but was immediately hushed-up and never developed. Now that’s pretty controlled.

  13. TJW

    The way the worldwide economy currently functions places more importance on allocating resources to those who can afford them rather than dealing with any of the underlying socio-economic issues. Constant economic instability is one of many clear indications that we are in dire need of entrepreneurial and technological developments that will aid sustainability and the creation of new resources, rather than the continuing reallocation of the shortage we currently have. Each country’s focus is on fixing their own problem, when we should address the problem’s source directly.

  14. Jay M

    According to EIA most of KSA capacity is composed of light crude, though Safaniya and Manifa with about 2.1 mm barrels/day are listed as heavy. EIA notes that Manifa @ .9 mm barrels/day will only come into production at the end of 2014 (about now?). Is it possible that the heavy is being offered at a discount because they have to move the shit, along with all the geopolitical realpolitik of the heavy breathing empire?

  15. Fiver

    Oil has been kept at artificially high levels for years courtesy of a weak dollar; a more-or-less constant ‘war/enemy producer’ premium’ due to US-created mayhem in: Libya, Iraq, Iran (sanctions), Venezuela, Ukraine (also Nigeria and Sudan); and of course, the artificial demand created by tens of trillions in Central Bank ‘easing’ globally. Higher prices served the Saudis, US domestic shale oil companies (and suppliers, and States, and voters) tantalized by the prospect of a potential boom, US oil majors and an apparent withdrawal from Iraq (except for the fortress/embassy in Baghdad and its gigantic ‘security’/intelligence apparatus and contractors) and of course, Wall Street. Financialization of oil alone, of course, accounts for at least as much as the price has already fallen.

    What changed? Well, the marked slowdown in China was masked by US and other CB QE/financialization even as the instability due to US policy vis a vis Russia, Ukraine, Middle East, etc., has been sending money into the US in droves, strengthening the dollar, while also knocking demand down even further in Europe. As many have noted, this confluence of factors has set the stage for the US to attempt to cripple Russia. However, given how rapidly this could unwind the domestic oil boom, which has been the only domestic driver, and given how crucial Russia is to resolving Syria/Iran and much else, and further whether the US really believes it can push Putin/Russia any more than it can Teheran, I don’t think the oil price will be allowed to fall too far – what the US economy needs, what the world needs, is genuine stability and a sense of a future of same. The best way to secure that would be for the US to abandon this idiot ISIS crisis. As the US/Saudis etc. created this group, they can be controlled – for a political price. The US ought to convene a regional peace conference that includes all States and sub-State players. The Sunni/Shia schism brought about by the US in Iraq needs to be buried. This can be done by recognizing Assad as legitimate leader in Syria, Iran as legitimate, and the needs of Sunni in Iraq and Syria met with financial, humanitarian and most importantly concrete investments in the hundreds of billions. Or we can just keep making the wrong choices for the wrong reasons, including just saving face, and watch the global economy hit the iceberg over the winter. There is no more time for ‘same old, same old’ stupidity.

      1. gepay1

        The US refused to take out Assad because the Russians wouldn’t let Nato become the rebels’ air force. Qaddhafi was holding out quite well until NATO came in. Any halfway decent mechanically advanced military with air power can hold out against ground forces without air power. Also the Sarin false flag gas attack didn’t work. Nobody was fooled. It was not for lack of trying. So now they are using the back door of attacking ISIS in Syria to get the air force flying over Syria.

        1. Yves Smith Post author

          Huh? The Obama Administration very much wanted to take out Assad. But the public was so opposed that even the normally supine Congress rebelled. Obama had said he would put it to a vote, and even with leadership pushing hard for votes, opposition in Congress was close to 90%. Obama could not put the matter to Congress and then go in with that level of rebellion. It would damage the Dems, particularly if Syria proved to be a tar baby (likely, nothing in the Middle East seems to work out according to US plans, save the looting by the military-industrial complex part).

      2. Fiver

        The spat over Syria, the resulting Saudi “outrage” and vow to create a new army from scratch to take down Assad, the ‘from scratch’ being the re-branding of US/Saudi-sponsored terrorists in Syria (largely mercenaries from Iraq to begin with) as ISIS, re-pointing ISIS to take out al Maliki, Obama’s ‘coalition of the willing’ to ineffectually bomb ISIS (in other words, not a serious effort to take them out) all have yielded a 2-track, coordinated US/Saudi approach: Assad is still to be removed in exchange for Saudi oil price manipulation targeting Russia, Iran and the American pre-election consumer. The US/Saudi relationship has its ups and downs, but until such time as Saudi production goes into decline, only a geopolitical earthquake could seriously disrupt the relationship. I don’t rule such an event out, but for now I view all the reported ‘fuming’ in Riyadh and ‘f*** the Saudis’ yammer on Capitol Hill and in media largely as cover allowing the US and others to distance themselves from responsibility for the entire mess from Libya through Syria to where we are now.

  16. Synoia

    Lower prices at the end of Summer, pah!

    Wait until winter and the home heating oil demand kicks in.

    Then talk about energy prices.

  17. Rosario

    Interesting since I don’t see the USA having any part of this. Falling oil prices will destroy the growing oil sectors in the USA (fracking, shale, and similar). They are industries that are barely sustainable with $100 per barrel oil. Sure some may cheer it on as a gut punch to Russia, but it hurts USA much the same if not more.

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