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Another low

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By Ed Crooks: January 22, 2016: Jan 22, 2016

Another week, another fresh 12-year low for oil prices. The trigger for the latest leg down in crude, which took US benchmark West Texas Intermediate close to $26 per barrel on Wednesday, was a report from the International Energy Agency warning that “the oil market could drown in over-supply”. For a third successive year, it looks likely that global oil supply will in 2016 exceed demand by more than 1m barrels per day, leading to a continued accumulation of stocks in storage. Could the oil price go lower still, the IEA asked rhetorically, and replied: “the answer to our question is an emphatic yes. It could go lower.”

Daniel Yergin, author of the classic history of oil, The Prize, wrote in the FT arguing that the oil price was at the mercy of geopolitics.

The steady flow of announcements from oil companies cutting costs in response to those weaker prices has also continued. Schlumberger, the world’s largest oil services group, said it cut 10,000 jobs in the fourth quarter of last year, part of a total reduction of 34,000 from its peak in staffing in November 2014. Royal Dutch Shell promised a further 2,800 job cuts if its planned acquisition of BG Group went through, bringing the total in this cycle to 10,000. It made the commitment as it warned of a 40 per cent fall in its earnings in the fourth quarter of last year, making it the first big oil company to give a sense of how tough conditions were at the end of 2015, even with oil prices significantly higher than they are today. Oklahoma City-based Devon Energy also warned of imminent job cuts. Several CEOs of large international oil companies were at the World Economic Forum in Davos, and Bloomberg reported that their mood was generally sombre, in spite of their surroundings.

Oil’s brief descent below $30 reinforced expectations that there is a big shake-out coming in the US shale industry. Moody’s, the credit rating agency, cut its oil price assumptions for the next three years, and said that as a result it was looking at possible downgrades for a whole raft of oil companies. It added that in the US alone, 69 E&P and oil service companies were being put under review. Distressed debt investors see an opportunity, but there is a warning for lenders in the results of asset sales from companies that went into bankruptcy last year. The proceeds have typically been much smaller than their debts.

At least there is one oil company leader who is sounding confident: Khalid al-Falih, chairman of Saudi Aramco. He told the WEF in Davos that while Saudi Arabia did not want $30 oil, “if prices stay low we will be able to withstand [it] for a long time.”

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