Oil Price Falls as Global Growth

Anxiety Weighs on Markets

By STANLEY REEDJAN. 15, 2016
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Irans Balal offshore oil platform in the Persian Gulf. CreditBehrouz Mehri/Agence
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LONDON Global markets sank sharply on Friday as crude dipped below$30 a
barrel on concerns about China and a potential flood of new oil from Iran.
The recent turmoil, across stocks, bonds, commodities and currencies, reflects investors
growing anxiety about global growth. The swirl of forces are interconnected, so the
volatility in one area can quickly spread to other countries and other markets.
The tumult in China, where stocks are now in bear-market territory, is helping drag
down oil prices. China, an important energy consumer, is facing a slowdown that could
hurt its demand for crude.

Oil prices are also getting crimped by the threatened arrival of new supplies to add to
the existing glut. The lifting of sanctions on Iran, part of a nuclear deal, paves the way
for the country to start exporting more oil.
It all makes for trouble in the stock markets, with the Standard & Poors 500-stock index
fell about 2 percent.
The sell-off started on Friday in China, where the main Shanghai index dropped 3.6
percent. The index has fallen more than 20 percent from its December high, a threshold
that analysts generally regard as a bear market.
Chinas troubles have affected the price of oil, which is off more than 70 percent over the
last 18 months.
On Friday, the futures for Brent crude for March delivery were trading at $29.06 a
barrel on the Intercontinental Exchange. West Texas intermediate crude settled at
$29.42 a barrel, or down 5.7 percent. As recently as May, Brent crude was trading at
about $65 a barrel.
Whether the volatility subsists will depend largely on the direction of the global
economy and how it affects demand for oil.
In China, the worlds second-largest economy after the United States, underlying growth
continues to slow. The government is expected to report next week that economic
growth cooled last year to 6.9 percent. That figure would be the envy of many countries
but that would signal Chinas slowest pace in a quarter of a century.
China and other growing Asian economies have become important customers for oil
exporters like Saudi Arabia and Iran, particularly as rising production of oil in the
United States has reduced American imports. If the economic weakness in China leads
to a sharp fall in demand, the big producers will most likely discount their oil even more
aggressively to attract buyers.
Oil prices are also under pressure because an easing of international sanctions on Iran
could come in the next few days. Sanctions have crimped Irans production and sales in
recent years. If they are removed, Iran could start to ramp up production and rekindle
sales to former customers in Europe and elsewhere. In the coming months, that could
add 300,000 to 400,000 barrels a day to an already oversupplied market, analysts
estimate.
Sentiment in the market is now very negative, analysts say. Traders are betting on stilllower prices, perhaps even heading toward the $20-a-barrel range.

With prices settling below the $30 level, it could set the scene for further declines next
week, said Richard Mallinson, an analyst at Energy Aspects, a research firm based in
London.
The low prices of oil are wreaking havoc in the industry, adding to the broad investor
anxiety.
Already, projects that are in their early stages are being postponed. Wood Mackenzie,
the Edinburgh-based consultants, estimated in the summary of a report released on
Thursday that the industry had deferred putting in place $380 billion worth of projects
globally. On Friday, the global mining company BHP Billiton said it was writing off
about $7.2 billion from its book value of shale holdings in the United States because of
the changed environment.
The dramatic fall in prices has led to the disappointing write-down announced today,
Andrew Mackenzie, BHP Billitons chief executive, said on Friday in a statement. Oil
and gas markets have been significantly weaker than the industry expected.
The cutbacks seem drastic, but it will take time for them to have a significant impact on
the balance of supply and demand. Despite weak prices, oil production was higher in
2015 as extensive investments in previous years began to translate into higher
production in the United States, Brazil and elsewhere. Even Britain, whose North Sea
region is widely viewed as struggling, showed increased output.
Seth Kleinman, an analyst at Citigroup in London, said it was unlikely that crude prices
would reach bottom before markets encountered production declines outside the United
States and the Organization of the Petroleum Exporting Countries.
Saudi Arabia and other members of OPEC continue to produce at high levels and show
no signs of abandoning their unwillingness to adjust outputs to regulate the market.
In order to maintain an efficient economy, you cant be pushing your production up
and down by half a million barrels a day to prop up prices somewhere else, said Sadad
al-Husseini, a former executive vice president of Saudi Aramco, the national oil
company, who now runs a consulting firm.
Source: http://www.nytimes.com/2016/01/16/business/energy-environment/oilprices.html?_r=0