Crude Oil Prices Hit Fresh Five-Year Low

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Crude oil prices accelerated their six-month slide Monday, plunging to fresh five-year lows after a key investment bank bearclawed the energy market, a major producer slashed its drilling and exploration budget by more than 20% and fresh reports pointed to slowing global economic growth. Oil dived 4 percent to new five-year lows on Monday, as Wall Street expectations of a deeper price slump next year and a Kuwaiti prediction for US$65 crude set off one of the biggest declines this year. 

The 4% drop in crude oil prices crimped Wall Street, pushing the Standard & Poor's 500 Index down 0.7% to 2060 and igniting big losses among already hard-hit energy producers and oil patch stocks. The latest drop in oil is likely to fuel fresh cuts in gasoline prices in the weeks ahead, saving consumers, shippers and airlines billions. Oil prices have yet to find a bottom. The chief executive of Kuwait's national oil company said oil prices were likely to remain around $65 a barrel for the next six to seven months, the latest indication that Gulf producers are content to ride out the rout. The pessimistic outlook deepened the decline in a market that many traders see as a one-way bet for the time being.

“When these things go lower, they tend to go much farther than people anticipated,” said Tariq Zahir at Tyche Capital. “I definitely think we’re going to keep heading lower, everyone is trying to pick a bottom.” Oil prices have plunged for months as global supply growth has outpaced expectations while demand has been tepid. The Organization of the Petroleum Exporting Countries opted to maintain its production quota in November, disappointing some investors who had hoped the cartel would lower production to tighten global supplies.

Top exporter Saudi Arabia has resisted calls from poorer members to curb output and shore up prices that have slumped more than 40 percent since June. It is unclear how soon the price slump will slow the U.S. shale boom. The number of onshore rigs drilling for crude oil remains relatively high, and new U.S. projections released on Monday show production from the big three U.S. shale plays should carry on growing at over 100,000 barrels per day into January.

One of the biggest victims of oil’s price collapse is Malaysia, Asia’s top crude exporter, where the stock market is on track for its first annual decline since the global financial crisis and ranks as the region’s worst performer this year. The FTSE Bursa Malaysia KLCI has fallen 6.5% in 2014, the only market in Southeast Asia to record a loss for the year, as investors look instead to markets such as India and Indonesia and dump holdings in oil-related stocks. The ringgit has also suffered, dropping to 3.4470 per U.S. dollar on Thursday, its weakest level in nearly five years. Yields on 10-year government bonds have risen to 3.89%, from a 12-month low of 3.78% in mid-October. Bond yields rise as prices fall.

“Malaysia is one of the weakest markets within the region. In the context of drops, it is not very large. But relative to the traditional low beta of the market, it is a big move,” said Gan Eng Peng, head of equity at Affin Hwang Asset Management Bhd. in Malaysia, referring to a measure of volatility. The firm is selling out of oil-and-gas companies and moving into stocks that may benefit from lower oil prices. It is also increasing its holdings of cash to more than 20% in most of its funds, a high level for almost any manager.

It is unclear how soon the crude oil price slump will slow the global economy. Many companies are already starting to make deep cuts to spending for next year. It isn’t just oil prices that are contributing to the malaise in Malaysia. Maybank Investment Bank research, which covers 74% of the Malaysian bourse by market capitalization, calculates that core net profit for the companies it tracks contracted an average of 5.5% year-on-year in the third quarter.

Affin Hwang’s Mr. Gan said the only good news could be that nonoil-related stocks may be suffering more than is justified. However, with share prices down, oil prices lower and capital expenditures being cut, he expects more business and financial disruptions to come. “A credit crunch within the oil-and-gas space is a possibility,” he said.