Oil volatility hits industry as ‘price war’ weighs

The rollercoaster ride in oil prices continued on Thursday, after the market tumbled on news that U.S. inventories were at a near-80 year high.

The price of Brent and WTI crude oil veered between losses and gains in early trading. By 12:00 p.m. GMT, Brent was around 1.3 percent higher at $54.89 a barrel and WTI was up around 0.7 percent at $48.81.

This shift higher followed price declines of around 6.5 percent on Wednesday, after the Energy Information Administration reported that U.S. oil inventories were at their highest since 1930. The news intensified investor fears that prices—which have fallen by around 50 percent since last June—would remain under heavy pressure from global oversupply, as well as from the strong U.S. dollar and weak demand.

‘Price war’ set to continue

This volatility could be set to continue, with one oil expert warning on Thursday that the growth in U.S. output would not start to slow until mid-2015 at the earliest.

“You’re just seeing a huge amount of production coming on. I don’t think we expect to see any declines in U.S. output until at least the middle of the year… But in terms of significant production coming off, it is going to take a bit longer,” Jason Feer, head of business intelligence at advisory firm and brokerage Poten & Partners, told CNBC.

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The International Energy Agency noted last month that U.S. companies were revising down their capital expenditure plans for 2015, with estimates for decreases ranging between 10 percent and 50 percent. The agency also said there had been reports of small U.S. operators filing for bankruptcy—these include WBH Energy, a tiny shale producer in Texas. In addition, contract drillers such as Pioneer Energy Services were reporting early rig contract terminations.

“By the end of the year, and early next year, you are going to start to see those capex cuts really bite,” said Feer. “I think something is going to have to give…The price war is really going to continue until somebody blinks.”

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In the short-term, Feer warned that there would be some “real pain.”

“You are seeing fairly large shale players in trouble, because they are so highly leveraged,” he said.

Oil companies ‘under water’

Simon Flowers, head of corporate analysis at Wood Mackenzie, said that “very few” oil companies could manage their cash flows with prices so low.

“Our numbers suggest that virtually every oil company is under water at current prices of $50 or so,” he told CNBC.

However, Feer noted that in the case of U.S. shale, industry-wide efforts were helping lower the cost of production, bringing down the breakeven price.

“A year or two ago, everybody said $70 or $80 was breakeven. Now it looks like a lot of people are breakeven at $50, and that is heading down, and you have got hundreds of tech companies trying to figure out to make this cheaper,” he said.

“Even the major oil companies—Shell, Exxon—who are looking at shale, are really welcoming that and helping to fund that, to help drive those prices down.”

Saudi resists calls for cuts

Under pressure from Saudi Arabia, the Organization of the Petroleum Exporting Countries (OPEC) has to date refused to cut production in order to boost global prices. On Thursday, Saudi’s finance minister, Ibrahim Abdulaziz Al-Assaf, reiterated that his country had no plans to give into demands to decrease output.

“We (have) built the buffers to help us in sustaining our policies, and not disrupting them, so I am comfortable that we will be able to continue that,” he told CNBC.

Other OPEC members are less confident, however, and have expressed concerns about the impact of oversupply. On Wednesday, Iranian Oil Minister Bijan Namdar Zanganeh said that excess global crude supply of 2 million barrels per day would weigh on oil prices for the first six months of this year, according to Bloomberg.

‘Goldilocks’ oil price?

Hopes exist that a slight increase in oil prices could prove enough to keep the industry healthy, while maintaining the economic stimulus of a low price environment.

“The recent pick-up in oil prices has the potential to develop into a ‘Goldilocks’ scenario: prices high enough to keep most oil producers in business, but low enough to provide a substantial boost to global economic activity,” Julian Jessop, chief global economist at Capital Economics, said in a research note on Wednesday.

He forecast that Brent prices would recover to $60 a barrel this year and to $70 over the medium-term.

“From the perspective of the world as a whole, $60 to $70 could be pretty much the perfect outcome,” said Jessop.

“Some stabilization in oil prices—at almost any level—would remove a major source of uncertainty and volatility. The apparent free-fall in the price of the world’s most important commodity had understandably fueled concerns that that something was seriously wrong in the global economy.”

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