CRUDE markets are in for some more battering!Last week Saudi Aramco extended its January discount for Arab Light sales to Asia to $2 a barrel below a regional benchmark - the lowest in at least 14 years. The Arab Light Official Selling Price to the United States was also set at a premium of $0.90 a barrel to the Argus Sour Crude Index (ASCI) for January, down 70 cents from the previous month. “This is the second salvo in the OPEC price war, a new offensive by the Saudis,” Phil Flynn, analyst at the Price Futures Group in Chicago was quoted as saying. During the OPEC ministerial in Vienna, it was agreed initially that all producers, both within and outside the OPEC, must contribute to the proposed output cut. But when Russia and some others refused to partake in the constraint regimen, allies had little option. They marched, hand in hand, to protect their market share. It would be better to endure short-term pain from low oil prices than risk losing market share in the long run. Saudi Arabia and other producers would only consider adjusting production if other members of OPEC adhered to the group's quotas and stopped making “under the table” deals to sell crude. Prices thus had to go down. Early on Friday, Brent crude was poised for the lowest close in more than five years. Futures too slid as much as 1.1 percent in London and were headed for a second weekly decline. When would it bottom out, remains a big if. The Gulf states “don't have a price target, and if prices drop further below $60, it won't be for a long time,” a Gulf oil official was quoted as saying by The Wall Street Journal (WSJ). Iran's parliament too has recommended basing next year's budget on an oil price of $75-80 a barrel, down from $100 in the 2014 budget. “Parliament and the planning commission recommend an oil price of about $80 a barrel to the government,” Gholamreza Tajgardoon, head of parliament's planning and budget commission said recently. And the rot continues. Even after plunging almost 40 percent in five months, WTI crude oil prices will continue to fall in coming weeks, Oppenheimer senior energy analyst Fadel Gheit told CNBC. Canadian Natural Resources CEO Murray Edwards told reporters Friday he expects oil to hit bottom around $30, before bouncing back to around $70 or $75 in the medium term. “Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time.” “This is a big shock in Caracas, it's a shock in Tehran, it's a shock in Abuja,” said eminent analyst Daniel Yergin, on Bloomberg Radio. “There's a change in psychology. There's going to be a higher degree of uncertainty.” Many analysts are claiming that shale production in the US and investments in the sector could be two major casualties of the existing uncertainty and the bottoming crude prices. However, it won't be easy to accomplish. Argus Media quoted the Iranian oil minister as saying that squeezing non-OPEC production out of the market will take years rather than months. Oil majors ExxonMobil and Chevron are now insisting they weren't losing sleep over the price drop. In fact, they could survive oil as low as $40 per barrel. Exxon CEO Rex Tillerson told CNBC on Wednesday his company's massive energy projects are decade-long investment decisions that have been tested to be successful even “at the bottom of the cycle.” He emphasized “we test across a range all the way down to $40 and up to $120.” Chevron also believes it could weather the storm down to $40 a barrel, says analyst Fadel Gheit, citing a recent conversation with executives from the energy giant. Most producers in North Dakota's Bakken formation, an area that's been a key contributor to the shale revolution, can remain profitable even if oil falls to $42 per barrel, the IEA said last month. Paul Stevens of Chatham House in London too believes some US shale producers may break even at $40 a barrel or less. “US shale producers are surprising resilient. They will drill as long as they have cash flow from their operations,” said Per Magnus Nysveen of Rystad Energy. But the days of $100 oil might be a thing of the past for now. Leonid Fedun, a board member at Russia's Lukoil though is of the view that by maintaining output levels, OPEC would bring about an outright crash among US shale drillers. “In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.” Tony Roth, chief investment officer at Wilmington Trust, told Reuters “crude seems to have no floor right now, and we could easily see the price drop into the low $60s.” Ed Morse, global head of commodities research at Citigroup, told WSJ “there's lower prices ahead.” Downward spiral hence continues!
