The World Bank is telling us pretty much what the oil market and copper already has been telling us, and that is that the outlook for global economic growth is getting worse, not better. The World Bank lowered its growth estimate, predicting that the global economy will expand only 3% -- down from their earlier forecast of 3.4%. If that wasn't bad enough, they also lowered their outlook. The group said the U.S. economy is the only bright spot for global growth--and plummeting oil prices won't be enough to offset deepening trouble in the eurozone and emerging markets. And OPEC is piling on by trying to create more pain for their personal market share gain.
Of course plunging oil prices are creating more problems for the energy industry, and a crash in that market may lead to contagion in other markets and add to the deflationary pressures that are evident in commodity and capital markets around the globe. What is more, the so called bright spot, U.S. economy has been driven in part by energy investment that could soon be drying up.
Just yesterday Goldman Sachs predicted that we could see $2 trillion of future oil projects canceled or put on hold because of the oil price crash. That is double what they predicted just one month ago. Gordon Kwan, Nomura's head of oil research, surmises that about half of the world's oil-producing projects aren't economical if oil prices remain below $50 a barrel, according to Dow Jones. What is more, the IBD reported that Goldman Sachs (NYSE:GS) said that in order for companies to survive the lower prices, they need to cut costs by 20%-30% and firms with quality balance sheets need to scrap uneconomic plays and buy more promising projects.
That of course means less job creation, even as the Energy Information Administration (EIA) says that U.S. crude oil production in 2015 will exceed its 2014 level and the crude price crash will slow the exceptional production growth that has helped drive the U.S. economy. The EIA says that "many oil companies have cut back on their exploration drilling in response to falling crude prices and will concentrate their drilling activities in established areas that already have productive wells." That pullback in drilling was seen quite clearly in the Baker Hughes rig count earlier in the week that showed that oil rigs declined by 61 to 1,421, the largest drop in rigs since February 1991.
Yet oil supply continues to rise as U.S. production stays high and demand remains questionable. The American Petroleum Institute reported that crude stocks increased by 3.9 million barrels last week, putting supply very close to all time highs for this time of year. We also saw distillates rise by 416,000 barrels and gasoline supply increase by 1.6 million barrels.
Also of note, Brent crude traded at a discount to West Texas Intermediate, as the demand prospects look better in the U.S. than other places in the world and the fact that the U.S. is exporting more oil. The request of the Mexican government to receive U.S. condensate was another factor in bringing WTI back in line with the Brent Crude market.
While the mood is negative, oil bounced hard off my $44 a barrel target, which could mean we may have found at least a short term bottom on oil. Today keep an eye on U.S. demand numbers in the Energy Information Administration report and on supply in Cushing, Oklahoma. A surprise drop there or a sign demand for gas and oil could give the market a reason to try to stabilize, if not retest $50.
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