Oil tumbles to 5 1/2-year low as OPEC reaffirms stance

Oil dropped to the lowest level in more than five years on growing evidence that OPEC won’t pare output to reduce a global supply surplus.

Brent and West Texas Intermediate futures capped their seventh straight weekly decrease. The United Arab Emirates has no plans to reduce output no matter how low prices drop, according to Yousef Al Otaiba, the nation’s ambassador to the U.S. Representatives from Saudi Arabia, Kuwait and the U.A.E. stressed a dozen times in the past six weeks that OPEC won’t curb output to halt the rout. WTI’s discount to Brent shrank to its narrowest since October.

“The price war continues and there’s a great deal of excess supply,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone. “The statements from the U.A.E. ambassador show that they’re doubling down and taking no prisoners. This will be a long fought war and they have the Saudis behind them.”

Oil Prices

Oil is trading at the lowest levels since April 2009 amid concern that a global supply surplus estimated by Qatar at 2 million barrels a day will persist this year. The Organization of Petroleum Exporting Countries is battling a U.S. shale boom by resisting production cuts, signaling it’s prepared to let futures fall to a level that slows the American output.

WTI, Brent

West Texas Intermediate for February delivery slipped 43 cents, or 0.9 percent, to settle at $48.36 barrel on the New York Mercantile Exchange. The volume of all futures traded was 29 percent above the 100-day average for the time of day. The contract touched $46.83 on Jan. 7, the lowest intraday price since April 21, 2009. Futures declined 8.2 percent this week.

Brent for February settlement decreased 85 cents, or 1.7 percent, to $50.11 a barrel on the London-based ICE Futures Europe exchange. This is the lowest close since April 28, 2009. Volume for all futures traded was 60 percent above the 100-day average. It slipped 11 percent this week. The European benchmark closed at a $1.75 premium to WTI.

“The spread has narrowed because of the more extreme weakening of Brent,” Mike Wittner, head of oil research at Societe Generale SA in New York, said by phone. “The OPEC decision to maintain production is having a greater impact on Brent. We’re expecting the spread to stay tight this year because of huge global stock builds.”

Jobs Report

Futures initially rebounded from the session’s lows after government data showed that U.S. employment rose more than forecast in December and the jobless rate fell to 5.6 percent, wrapping up the best year for the labor market since 1999 and adding to evidence the U.S. is a standout in the global economy.

“The WTI discount is shrinking because the U.S. economy is doing much better than what we see in most of the world, which should lead to stronger demand here,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion, said by phone. “The Saudi decision to protect market share will continue to put pressure on Brent.”

The U.A.E. can live with current market conditions for “a lot longer than people expect,” Al Otaiba, the ambassador, said in Washington yesterday. “This extra glut in the market is not coming from the OPEC members, so therefore why should the OPEC members have to cut their production?”

OPEC won’t reverse course even if crude prices fall as low as $20 a barrel or non-OPEC countries offer to help with production cuts, Saudi Arabian Oil Minister Ali Al-Naimi said in an interview with the Middle East Economic Survey on Dec. 21. The kingdom may even bolster output if non-OPEC nations do so, he said.

‘Unfounded’ Expectation

“The expectation that the Saudis and other Gulf producers will cut production in a matter of months is unfounded,” Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts, said by phone. “The Gulf producers will probably maintain production through 2016, absent a disruption. The ball is now in the other producers’ court.”

OPEC’s 12 members agreed on Nov. 27 to maintain their collective output quota at 30 million barrels a day. The group produced 30.2 million barrels a day of crude last month, according to data compiled by Bloomberg. They’re next scheduled to meet on June 5.

U.S. output expanded to 9.14 million barrels a day in the week ended Dec. 12, according to the Energy Information Administration. That’s the most in weekly data from the Energy Department’s statistical arm that started in January 1983.

U.S. producers are bailing out of long-term contracts for rigs as prices plunge. Helmerich & Payne Inc. (HP), the biggest rig operator in the U.S., said it had received early termination notices for four contracts, while Pioneer Energy Services Corp. said four rigs have been canceled early. Producers may cut short another 50 to 60 agreements, according to Andrew Cosgrove, an analyst at Bloomberg Intelligence.

Idled Rigs

Drillers idled crude rigs this week by the most in more than two decades as prices plunged. Active rigs declined by 61 to 1,421, Baker Hughes Inc. (BHI) said on its website today. It was the largest drop in rigs since February 1991.

“I don’t think we’ve reached the bottom yet,” Wittner said. “You are seeing the impact of the price drop.”

WTI may fall next week, according to a Bloomberg survey. Twenty-two of 43 traders and analysts, or 51 percent, said futures will decrease through Jan. 16, while 11 respondents predicted a gain.

Gasoline futures fell 1.77 cents, or 1.3 percent, to $1.3232 a gallon, the lowest settlement since March 11, 2009. Ultra low sulfur diesel slipped 0.8 cent, or 0.5 percent, to close at $1.703.

Regular gasoline at U.S. pumps fell to the lowest level since May 2009. The average retail price slipped 1.4 cents to $2.168 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group. Pump prices were around $2.05 a gallon when oil was last below $50 a barrel.