Oil plunges to a 6-year low. Is $30 a barrel next?
CNNMoney (New York) March 16, 2015: 5:39 PM ET
Extremely cheap oil is back, and it may get even cheaper. Crude plunged 4% to as low as $42.85 a barrel on Monday. That’s the lowest price since March 2009 and marks the fifth consecutive day of losses.
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A month ago, people were talking about an “oil comeback.” Now that looks like ust a mirage. More and more analysts predict prices of $40 or lower, at least in the near term.
“I think the market almost has to have a $30-handle on it before it gets this out of its system,” said Tom Kloza, chief oil analyst at the Oil Price Information Service.
That could cause gas prices to take another tumble, Kloza says, bringing the average U.S. price back to around $2 a gallon. It’s currently at $2.42.
What’s fueling the latest plunge? The world still has too much oil. The supply glut that sparked the dramatic crash in crude from $100 a barrel last summer to under $50 in January remains. Oil settled at $43.88 on Monday.
The key now is to see a pullback in production, but so far no one wants to budge. OPEC hasn’t scaled back production, and power player Saudi Arabia continues to say it has no intention to do so.
In the U.S., shale companies also continue to pump more and more oil. While there are signs that the number of oil drilling rigs has fallen significantly in recent weeks, there’s a lag before that drop in rigs really translates into less production.
“Shale production is not getting dented,” says Kloza.
While the oil slide has been going on for months, there are key thresholds that act as trigger points for the market. Crude’s collapse below $43.50 a barrel on Monday represents one of those points.
Barclays said that breach makes the bank more negative on oil and signals a further move below $40. In other words, the selling is probably not done.
“It will overreact to the downside. There are an awful lot of smart people who think this market is on a rendezvous course with the December 2008 low of $32.40,” says Kloza.
That level represents a modern day low, although it occurred under extremely different circumstances. Back then oil was slammed by lack of demand as the world’s largest economy was trying to rescue itself from a major financial crisis. Today oil is falling because there is too much supply.
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