The slide in oil prices continued on Thursday with Brent crude prices dropping below $90 a barrel for the first time in two years and West Texas Intermediate prices entering bear market territory. The price drop comes amid general concerns over weakening demand globally and oversupply from the U.S. because of increasing shale oil production.
CIBC called it “a perfect storm” with demand being impacted by Europe’s near recession and lower expectations for oil consumption in China. At the same time, production in the U.S. has soared by over 3 million barrels per day in the last two years. “The U.S.’s reemergence as an oil superpower, thanks to shale, has coincided moreover with a rise in OPEC productions to two-year highs,” CIBC notes.
In addition, some market players are wondering about the traditional stabilizing role that Saudi Arabia has played in the oil markets, suggesting even that Saudi Arabia might let oil prices drop as a way to fight against the U.S. shale revolution. “We believe the most plausible interpretation of Saudi motivations is that they think they can win any price war given shale’s full cycle production costs of considerably more than Saudi’s ~$4/bbl,” Citigroup said in a recent research note. So far there has been no indication from OPEC that it will reduce production to increase prices.
For now, the drop in oil prices means a drop in energy company stocks. Shares of oil and commodities stocks were hit hard on Thursday. Chevron’s stock fell by 2.7% while shares of Anadarko Petroleum tumbled by 6.5%. Shares of smaller oil and gas companies closely tied to the shale revolution saw their shares hammered—QEP Resources’ stock fell by 7%. Shares of U.S. chemicals companies that have benefited from the spread between natural gas and oil-based feedstock have also experienced weakness as oil prices have fallen. LyondellBasell’s stock fell 3% on Thursday.
The geopolitical backdrop for this oil price weakness—fighting in Iraq and Libya, tensions in Russia and Ukraine—has not spooked markets or led yet to a fall in production in these producing countries. The big drop in the price of oil could, if sustained, fuel the U.S. economy. It might eventually help the stock market, but it certainly didn’t on Thursday.