Oil breaks $40 barrier for first time in six years

HOUSTON — U.S. oil fell below $40 per barrel on Friday, as traders continued a rout that is likely to hand the futures contract its longest string of consecutive weekly losses since the bust of 1986.

The march below $40 has been on the horizon for weeks as oil prices plunged in July, fueling a fresh round of anxiety in the industry, said Rusty Braziel, president of Houston-based energy analysts RBN Energy.

“This was inevitable,” he said. “It made no sense to me that crude oil hung around $60 per barrel a few weeks earlier this year.”

For the exploration and production companies headquartered in Houston, the continued slide in prices will likely trigger another urgent round of cost cutting, Braziel said.

“Better tighten your belts and be prepared for relatively low prices over the long haul,” he said.

Fears that China’s economy may be sputtering and signals that global production is on the rise have driven oil lower for the past seven weeks, and barring a large recovery Friday, soon to be eight weeks. Those concerns combined once more on Friday as an early economic indicator in China came in at a six-year low.

“(China’s) stock market problems, their currency problems, all these are signals that they are having a general slowdown,” said Arthur Gelber, founder and president of Gelber & Associates.“That will cause a lot of shaking and quaking in Houston.”

West Texas Intermediate crude briefly fell below $40 in mid-day trading. (via Bloomberg)
West Texas Intermediate crude briefly fell below $40 in mid-day trading. (via Bloomberg)

West Texas Intermediate grade oil for delivery next month, the benchmark U.S. price, fell below $40 per barrel before noon on New York Mercantile Exchange trading Friday. Just after noon, the contract continued to hoover around $40, moving up and down by a few cents.

Brent crude, the international benchmark, was down on London’s ICE Futures Europe.

On Friday, the preliminary August reading the Caixin China Purchasing Managers Index, one measure of China’s economic health, fell again despite the government’s efforts to support the country’s economy. China is the the world’s second-largest oil consuming economy.

The Caixin index fell to early reading of 47.1 in August, down from 47.8 in July. Figures under 50 indicate a contraction.

“It’s just continuing the hemorrhaging of crude oil prices in a market that is overwhelmed with bearish news,” said Andy Lipow, president of Lipow Oil Associates in Houston.

Although U.S. producers have gradually ratcheted back production, anxiety about the Chinese economy has started to infect market sentiment outside of Asia, as traders fear that the news signals a slowdown in the growth rate of economies around the world amid a growing global glut of crude, Lipow said.

The anemic global economy has worried traders who had seen economic growth as a key to absorbing the glut of oil that has forced down prices since last year.

And with cuts from North American production coming slowly and no cuts at all proposed by the Organization of the Petroleum Exporting Countries, analysts have begun to compare the bust not just to the brief downturn of 2009, but also the more painful crashes previously.

Oil bottomed at $31.41 per barrel in the crash of 2008.

“The key takeaway from both the 1986 and 1999 bear market cycles, in our view, is that it took a change in OPEC policy to help the market reverse the slide,” said Tim Evans, a energy futures specialist at Citi Futures. “In fact, in the 1999 case it took more than one round of cuts in order to fully rebalance the market.  Absent this kind of shift we don’t anticipate a V-shaped price recovery, with a broad U or even an L as the most likely alternatives.”

FuelFix reporter Rhiannon Meyers contributed to this report.

 

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