Brent crude hits six-year low as traders bet on supply glut

Opec disarray and expectations of Fed hike push oil price down by 5 per cent

The drop in price of crude oil reflects a loss of confidence in the market after the latest meeting of Opec, where ministers from oil-producing states failed to cut back supply (Corbis)

The price of a barrel of oil sank to its lowest level in almost seven years, as traders bet on a continued glut of global energy and a historic Federal Reserve interest rate hike next week.

Brent and US crude futures fell more than 5 per cent in trading, with Brent dipping below $41 a barrel, the lowest since March 2009. A barrel of West Texas Intermediate dropped below $38.

Analysts said traders were responding to the outcome of the latest meeting of the Opec cartel last Friday, where ministers from oil-producing states once again failed to cut back supply in order to support prices and also, for the first time in decades, dropped any reference to an output ceiling.

“Past communiqués have at least included statements to adhere, strictly adhere, or maintain output in line with the production target. This one glaringly did not,” noted analysts at Barclays. Saudi Arabia, the biggest producer in the cartel, has refused to curtail its own production without similar commitments from other members.

Analysts also said heightened expectations that the Federal Reserve will pull the trigger on its first interest rate rise since 2006 on 16 December was pushing up the dollar, and weighing on the greenback-denominated oil price. The dollar index, which prices the US currency against a global basket of others, rose 0.35 per cent yesterday.

Long-term oil prices also dipped sharply. US crude futures for delivery in a decade’s time fell below $60 a barrel. “It means that there is a loss of confidence in the market after Opec, and people expect low prices to last longer,” said Oystein Berentsen of Strong Petroleum in Singapore.

That view echoed the verdict of the investment bank Goldman Sachs, which said after last Friday’s Opec meeting in Vienna, that oil could fall as low as $20 a barrel.

That meeting ended in deadlock after the failure of Saudi Arabia, Venezuela and Iran to agree on a strategy. “Any tiny risk that Opec actually might do something in the next six months is completely off the table after Friday’s meeting,” said Bjarne Schieldrop, an oil analyst at SEB in Oslo. “With this risk out of the picture, the oil price declines further.”

The global oil price has fallen more than 60 per cent since the summer of 2014. As well as continued strong production from Opec, US shale oil production has held up better than many analysts expected despite a price collapse that has pushed many American outfits into operating losses.

According to Reuters, at the start of December hedge funds had short positions amounting to 172 million barrels of crude oil in the main futures and options contract on the New York Mercantile Exchange, the third largest short position reported.

That’s up from a short position of only 90 million barrels in October. If short positions in Brent are included, hedge funds have a combined short position of around 300 million barrels.

“We’re in a tug-of-war,” said Chris Jarvis of Caprock Risk Management, “between a heavily shorted market and a glut of oil in the US and globally, as Saudi Arabia continues to produce oil at elevated levels to maintain market share.”