Calendar An icon of a desk calendar. Cancel An icon of a circle with a diagonal line across. Caret An icon of a block arrow pointing to the right. Email An icon of a paper envelope. Facebook An icon of the Facebook "f" mark. Google An icon of the Google "G" mark. Linked In An icon of the Linked In "in" mark. Logout An icon representing logout. Profile An icon that resembles human head and shoulders. Telephone An icon of a traditional telephone receiver. Tick An icon of a tick mark. Is Public An icon of a human eye and eyelashes. Is Not Public An icon of a human eye and eyelashes with a diagonal line through it. Pause Icon A two-lined pause icon for stopping interactions. Quote Mark A opening quote mark. Quote Mark A closing quote mark. Arrow An icon of an arrow. Folder An icon of a paper folder. Breaking An icon of an exclamation mark on a circular background. Camera An icon of a digital camera. Caret An icon of a caret arrow. Clock An icon of a clock face. Close An icon of the an X shape. Close Icon An icon used to represent where to interact to collapse or dismiss a component Comment An icon of a speech bubble. Comments An icon of a speech bubble, denoting user comments. Ellipsis An icon of 3 horizontal dots. Envelope An icon of a paper envelope. Facebook An icon of a facebook f logo. Camera An icon of a digital camera. Home An icon of a house. Instagram An icon of the Instagram logo. LinkedIn An icon of the LinkedIn logo. Magnifying Glass An icon of a magnifying glass. Search Icon A magnifying glass icon that is used to represent the function of searching. Menu An icon of 3 horizontal lines. Hamburger Menu Icon An icon used to represent a collapsed menu. Next An icon of an arrow pointing to the right. Notice An explanation mark centred inside a circle. Previous An icon of an arrow pointing to the left. Rating An icon of a star. Tag An icon of a tag. Twitter An icon of the Twitter logo. Video Camera An icon of a video camera shape. Speech Bubble Icon A icon displaying a speech bubble WhatsApp An icon of the WhatsApp logo. Information An icon of an information logo. Plus A mathematical 'plus' symbol. Duration An icon indicating Time. Success Tick An icon of a green tick. Success Tick Timeout An icon of a greyed out success tick. Loading Spinner An icon of a loading spinner.

Oil: How low can she go?

Oil prices
Oil prices

With WTI on the precipice of breaking below $40/bbl, chatter abounds on just how low oil prices can go from here, with some discussing prices in the low $30s, or potentially lower.

While this type of price action is not without possibility, Bentek does not believe this is rooted in fundamentals, but rather, would be a short term phenomenon spurred by speculative trade capitulation and/or a brief storage shock.

In terms of the former, should the paper losses from traders holding long positions in oil become too difficult to bear, the market has the potential for a short term rout if/when there is a liquidation of positioning.

With regard to the latter, there remains some concern that this situation could arise in specific places, with the most notable being Cushing, OK, the delivery point for the WTI futures contract.

Fears have escalated that a storage shock could occur due to the recent unplanned outage at the Whiting refinery, and the apparent resiliency of U.S. production.

A storage shock would result at the point where the marginal buyer of crude at Cushing, or the market participant who has available storage, drops his/her bid for oil because storage has become full.

This can potentially lead to dramatic swings in the spot price to reflect that lack of buying interest, and to create incentive for suppliers to try and find an alternate location to send their crude, rather than send it on to Cushing.

While the aforementioned scenario cannot be completely ruled out, current oil prices already dictate that supply should respond in the not too distant future.

In other words, the market does not require significantly lower oil prices from current levels to deter future spending on exploration and production, without which, we should see some natural declines in supply.

Hedges in place for 2015 are likely one of the largest contributors to US production being maintained. But as we enter 2016 with fewer hedges in place, and with capital becoming more expensive for the E&P sector, in general, it should begin to manifest itself in less production growth, and begin to aid the market in finding balance once more.

A global macro/recessionary shock could place further downside risk on pricing due to implications for demand growth and the impacts of a deflationary cycle.

The force of that shock would need to be quite large, however, as it would not only need to result in less demand growth, but likely an actual drop in demand year on year, in order to bring about a situation in which prices would need to fall to a level that dips below cash costs for many global producers.

Recommended for you

More from Energy Voice

Latest Posts