Futures market tumble shows US oil will not reach US$50 for 6.5 years

[HOUSTON] Hopes for a recovery in oil prices evaporated further on Tuesday as long-dated futures contracts fell even more to show oil will stay stuck below US$50 a barrel until 2022.

The December 2017 West Texas Intermediate futures contract slid by more than 3 per cent, or US$1.29 a barrel on Tuesday, to settle at US$42.20 a barrel, while the December 2018 contract sank by US$1.30 a barrel, or 2.8 per cent, to a low of US$45.35 a barrel.

The declines came as the prompt futures briefly fell below US$30 a barrel before settling at US$30.44 a barrel, down 97 cents, or 3 per cent for the day. Oil has shed 20 per cent so far this year and 72 per cent since mid-2014.

At the moment, US benchmark futures are priced below US$50 a barrel through June 2022. Not a single contract, which can trade out to December 2024, is above US$52 a barrel.

The collapse of the back-end of the curve, where prices are generally better insulated from the catalysts that prompt fluctuations in nearby prices, offers a bleak outlook for US oil markets. "Compared to normal, it's just a whole shift lower,"according to John Saucer, vice president of research and analytics at Mobius Risk Group in Houston.

On Tuesday, a government report predicted the global glut would swell through 2017 as the easing of Western sanctions against Iran pushes more oil into the world market. Global production is expected to rise to 96.7 million barrels per day in 2017, up from 95.9 million bpd this year, the Energy Information Administration said.

Demand will grow only 1.4 million bpd in 2017, unchanged from the 2015 and 2016 rate, according to the report.

US output is expected to taper as shale producers pull back from drilling to avoid losing money.

Volumes at the back of the curve were fairly active with roughly 14,600 lots of December 2017 trading, the third most active day for that contract. More than 3,340 lots of December 2018 futures traded, marking its most liquid day of trade this year.

Barclays slashed its 2016 Brent and WTI forecast to US$37 a barrel, down from US$60 and US$56, respectively. French bank SocGen cut its 2016 Brent forecast by US$11.25 to US$42.50, and lowered its WTI outlook by US$9.25 to US$40.50 a barrel.

Standard Chartered said in a worst case scenario oil could potentially reach US$10 a barrel.

REUTERS