Surging U.S. crude supplies, and OPEC's forecast of sharply lower demand for its output combined to drive oil futures sharply lower Wednesday, raising the stakes for $50-a-barrel oil before the end of the year.
Oil has cratered more than 42 percent from its June highs, as increased U.S. oil production added to world supplies and global demand slipped. West Texas Intermediate futures sank another 4.4 percent Wednesday to a fresh five-year low just shy of $61 per barrel, and Brent lost another 4 percent to $64.19 per barrel.
New data from the Energy Information Administration on Wednesday showed a surprise build in U.S. oil supply for the week of Dec. 4. Crude stockpiles rose by 1.5 million barrels to 380.8 million barrels, while traders expected a drop in supply. The bearish report also showed a sharp build in U.S. gasoline stocks of 8.2 million barrels, meaning less oil will be required for fuel.
OPEC's loose alliance to hold down production showed some fissures Wednesday, when Iranian President Hassan Rouhani blamed falling oil prices on "treachery," in an apparent dig at rival Saudi Arabia, according to news wires. Iranian officials, at the cartel's meeting last month, spoke publicly in support of the Saudi-led effort to hold production levels in the face of falling prices, even though they had sought a production cut.
Oil was last at $60 a barrel during the financial crisis, and analysts said $50 is now in sight. "That's not out of the question. It's happening faster than I thought it would happen. I was calling for $50 but I was envisioning that happening in February. The odds for an emergency (OPEC) meeting are going up," said John Kilduff, oil analyst at Again Capital.
The surprise build in U.S. supply was met by another increase in U.S. oil production to 9.1 million barrels a day, compared with 9.08 million barrels the week earlier.
"It seems like the market can't find a bottom yet," said Gene McGillian, analyst at Tradition Energy. "You still have long positions by money managers outnumbering shorts by about 1.5 to 1. We're whittling that down. We haven't finished that. Right now the market is in free fall status. ... It appears we're going to break $60 and get near the $50 mark."
The Organization of the Petroleum Exporting Countries earlier Wednesday added to the weakness when it predicted a sharp decline in demand for next year. It said global demand for its crude would fall to the lowest level in more than a decade—to 28.92 million barrels a day in 2015, down 280,000 barrels.
OPEC last month voted unanimously to keep its output target at 30 million barrels a day, in an effort to hold on to its market share. The cartel blamed the drop in demand on weaker outlooks for Europe and Asia and higher supply growth from U.S. shale drilling and other non-OPEC sources. OPEC was reported to have pumped 30.05 million barrels a day in November.
An official in Iran's oil ministry Wednesday was quoted as saying said oil could drop to $40 per barrel if there is no production cut.
"The happy talk out of the OPEC meeting is quickly ending," said Kilduff. As for the Iranian forecast, "I think they're spot on. If they're going to persist with oversupply, prices will be driven lower until there's a supply response."
Iran's Rouhani also called the drop in prices "politically motivated" and a "conspiracy" against the interests of the region. "Iran and people of the region will not forget such conspiracies, or in other words, treachery against the interests of the Muslim world," he was quoted as saying, during a Cabinet meeting.
Saudi Arabia's oil minister, Ali al-Naimi, quoted by Reuters from Lima, Peru, appeared to fire back at the Iranian comments. He said production would not change unless customers come forward and say they want more oil.
If oil falls to the $50 level, it would be at an area analysts say could snuff U.S. production growth if it held there for any length of time.
Companies like ConocoPhillips and Chevron are reducing spending on new projects, but the impact of already planned increases in U.S. production into the first half of the year is likely to keep the world well supplied before the flow of new supply starts to slow in the second half of the year.
Besides shale production, U.S. Gulf of Mexico production also is expected to increase with new projects coming on line. Within a year, the projects will take U.S. Gulf production from 1.3 million barrels to roughly 1.6 million barrels a day.
The Energy Information Administration on Tuesday cut its forecast for daily U.S. production by another 100,000 barrels, to 9.3 million. That follows a reduction in its forecast of 100,000 barrels per day last month. The U.S. produced more than 9 million barrels a day for the past month, up about 1 million barrels from last year.
The government's forecast for 2015 is now below some private analysts' assumptions that oil production can continue to grow at a higher rate of anywhere from 500,000 to more than 1 million barrels per day next year, depending on oil prices.
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Analysts expect production growth won't begin to slow until the second quarter at the earliest and prices could get very low, falling more with lower demand expected at the end of winter.
Morgan Stanley this week put a target of $70 a barrel on Brent for next year. It also warned that Brent could sink in a worst-case scenario to $43 per barrel in the second quarter before recovering to only $48 in the third quarter.
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Kuwait this week said it sees oil at $65 a barrel for the next six to seven months, and Saudi Arabia has reportedly said it expects a floor of $60 per barrel in Brent.
Analysts say the lower oil prices go, the harder it will be to recover if producers keep pumping. But ultimately, they say it should stabilize and in two years, the world may well be somewhat short of oil due to the projects that are now being shut down and delayed.