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Crude Economics
Oil Companies Have Never (On Record) Had Year Start Like This

. . . and, for them, that’s not a good thing. Brent crude closed last year out at $36.61 per barrel, a far cry from the $110+ it was fetching in June of 2014, and in just a week, the European benchmark has dropped to just $34.07, at last check. America’s West Texas Intermediate has fared even worse, down to $33.74, and as Bloomberg reports, these bargain prices are costing producers huge sums of money and making 2016 a terrible start to the year for the industry:

More than $100 billion has been wiped off the 61-company Bloomberg World Oil & Gas Index this year as it plunged to the lowest since August 2004. It has dropped 5.6 percent, making it the worst opening to the year since the index started in 2003. Thailand’s PTT Pcl, Apache Corp. and China Petroleum & Chemical Corp. led the decline. […]

“It’s going from bad to worse very quickly,” Ahmed Ben Salem, oil and gas analyst at Oddo & Cie in Paris, said by phone. “Doubts over China’s demand have been added to already existing concerns over the surplus supply.”…“Companies have done a good job but oil prices have dropped so quickly they haven’t been able to adjust quickly enough,” Salem said. “2016 is going to be very tough for them as the oil market is unlikely to balance out this year.”

Plunging prices can be put down to a sizable glut of oil on the market—and on both the supply and demand side, there are reasons to think we might not have hit rock bottom yet. Supply-wise, Iran and Saudi Arabia’s worsening relationship effectively kills any possible coordinated action from OPEC to try to stop sliding prices by cutting production. And with Tehran prepared to boost its own oil exports in the wake of the impending cessation of Western sanctions and the Saudis continued insistence on pumping near-record amounts of crude, it doesn’t look like supplies are going to contract enough to balance out the market.

The picture doesn’t look any better on the demand side of things, either. China’s stock market tumble and its structural economic weaknesses mean Beijing’s appetite for oil isn’t likely to grow anytime soon, certainly not enough to help erase the oversupply. Taken together, this looks like something of a perfect storm for the oil market, and it’s hard to see this ending well for producers. Private companies and petrostates alike struggled to adapt to a bearish crude market in 2015, but 2016 promises to be an even tougher test—and indeed it already is.

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