Supply continues to weigh on Brent

Shale boom - Bloomberg02 December 2014, News Wires – Oil has plunged close to 40% in the past five months in its longest string of monthly losses since the 2008 crisis, as supply growth led by the US shale oil boom exceeded demand.

The recent decision by OPEC to maintain output has also pummelled prices.

Brent crude dipped $0.46 to $72.08 per barrel by Tuesday morning after a 3.4% gain on Monday. US crude fell $0.54 to $68.46 per barrel.

“Saudi Arabia and OPEC no longer have the mechanism to balance markets from the supply side,” said Mark Keenan, head of commodities research Asia at Societe Generale.

“Markets will have to balance themselves. As they learn how to do that, volatility will be very elevated.”

The bank cut its US crude and Brent forecasts to an average of $65 and $70, respectively, for 2015 and 2016.

Both contracts touched five-year lows on Monday, with Brent hitting $67.53 and WTI touching $63.72, before settling up.

“Yesterday much of the move higher right across the entire commodity complex … suggests that there was a strong element of people increasing their allocation to commodities, taking advantage of these low prices,” Keenan told Reuters.

Investors’ portfolio adjustments are usually done at the start of the month, he added.

Falling crude prices are an unprecedented test for producers of unconventional oil, the head of the International Energy Agency said on Monday.

As crude prices tumble, offshore drillers globally are increasingly considering “warm stacking” their rigs to take them temporarily off the market.

US oil producers have been racing full-speed ahead to drill new shale wells in recent years, even in the face of lower oil prices. New data suggests that the much-anticipated slowdown in shale country may have finally arrived.

But prices may need to drop more for existing output to start falling, said Paul Stevens, an energy expert at Chatham House. “The current level of shut-in price for shale oil is again debatable, but almost certainly is well below $40 per barrel,” Stevens wrote on Chatham House’s website.

“Thus it will be some time before existing shale oil production falls, even if prices stay low.”

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