The trigger for much of last week’s instability was the oil market where more damage will be done before conditions calm down.
The continuing fall in prices triggered worriers about bonds (especially high yield) issued by oil and gas groups to finance their shale projects.
Crude’s weakness has seen those fears gradually rise – but towards the end of last week they escalated quickly as investors wondered what a rate rise from the Fed this week might do to this market.
Crude fell to its lowest price in seven years on Friday after the world’s leading energy forecaster saw oil inventories continuing to grow next year with as supply outstripped demand.
Brent crude, the global oil benchmark, fell $US2.37 to $US37.36 a barrel — its lowest since December 2008. West Texas Intermediate, the US oil benchmark, dropped $US1.09 to $US35.67 a barrel, a level last reached in February 2009.
Brent closed the week at $US37.93 in after hours trading, down 4.5% for the day , and WTI ended at 3.1% lower at $US35.62 in New York.
For the week, Brent fell 13% and WTI 11% – huge falls and no wonder investors in other markets are worried about the financial stability of oil and gas groups.
Adding to the pressures, US natural gas futures fell under $US2 a million BTUs (British Thermal Units), the lowest for years.
Weakened by the inability of OPEC to agree on anything the week before, oil prices again headed south on Friday after the International Energy Agency said Iran’s return to world markets next year, when sanctions are lifted, would add to the existing supply 3 billion barrel glut.
“As extra Iranian oil hits the market, inventories are expected to swell by 300m barrels,” the IEA said in its December report. “And as inventories continue to swell into 2016, there will still be a lot of oil weighing on the market.”
“OPEC’s decision to scrap its official production ceiling [of 30m barrels a day] and keep the taps open is a de facto acknowledgment of current oil market reality,” said the IEA report.
“The exporter group has in effect been pumping at will since Saudi Arabia convinced fellow members a year ago to refrain from supply cuts and defend market share against a relentless rise in non-OPEC supply,” the agency said.
It said that while there is evidence that the Saudi strategy is starting to work, with non-OPEC supply expected to fall 600,000 barrels a day next year — the market will remain oversupplied.
The IEA said that higher output from OPEC members, led by Iraq and Saudi Arabia, has accounted for the lion’s share of the 1.8 million barrel increase in total supplies over the past year.
Non-OPEC supply increased by 300,000 barrels a day in the past year in November, a sharp reduction from the 2.2 million barrels a day seen at the start of this year.
The weaker oil prices have spurred the fastest demand growth in five years, with global consumption rising 1.8 million barrels a day in 2015. But the IEA said the pace of growth is expected to slow next year, to around 1.2 million barrels a day.
