Stocks Tumble After Weak Oil Forecast

At WSJ, "How Crude Oil’s Global Collapse Unfolded: Tracing the Plunge In Oil Prices Back to Texas":

Since the 1970s, Nigeria has sent a steady stream of high-quality crude oil to North American refineries. As recently as 2010, tankers delivered a million barrels a day.

Then came the U.S. energy boom. By July of this year, oil imports from Nigeria had fallen to zero.

Displaced by surging U.S. oil production, millions of barrels of Nigerian crude now head to India, Indonesia and China. But Middle Eastern nations are trying to entice the same buyers. This has set up a battle for market share that could reshape the Organization of the Petroleum Exporting Countries and fundamentally change the global market for oil.

On Friday, crude prices dropped to their lowest level in five years after the International Energy Agency cut its forecast for global oil demand for the fifth time in six months. That signaled to investors that the world economy would struggle in the coming year, sending the Dow Jones Industrial Average tumbling by 315.51 points, or 1.8%, to 17280.83. That’s the Dow’s biggest weekly percentage loss in three years.

Since June, the IEA has cut its demand forecast for 2015 by 800,000 barrels, while it says U.S. oil output will rise next year by 1.3 million barrels a day.

The drop in global oil prices from over $110 a barrel to under $62 on Friday has been portrayed as a showdown between Saudi Arabia and the U.S., two of the world’s biggest oil producers. But the reality is more complex, involving Libyan rebels and Indonesian cabdrivers as well as Texas roughnecks and Middle Eastern oil ministers. It reflects both the surging supply of crude and the crumbling demand for oil.

And the oil-price plunge may not end soon. Bank of America Merrill Lynch says U.S. oil prices could drop to $50 in 2015.

The roots of the price collapse go back to 2008 near Cotulla, Texas, a tiny town between San Antonio and the Mexican border. This was where the first well was drilled into the Eagle Ford Shale. At the time, the U.S. pumped about 4.7 million barrels a day of crude oil.

In 2009 and 2010, the global economy improved, demand for oil increased and crude prices rose, creating a large incentive to find new supplies. In Cotulla and elsewhere, U.S. drillers answered the call. “There was, for lack of a better term, an arms race for oil, and we found a ton of oil,” says Dean Hazelcorn, an oil trader at Coquest in Dallas.


Today, two hundred drilling rigs blanket South Texas, steering metal bits deep underground into the rock. Once drilled and hydraulically fractured, these wells yield large volumes of high-quality oil; at the moment, the U.S. is producing 8.9 million barrels a day, thanks to the Eagle Ford and other new oil fields.

Americans aren’t pumping more gasoline or otherwise using up all that new crude, and under U.S. laws dating back to the 1970s, it has been almost impossible to export.

As a result, American refineries snapped up inexpensive crude from Texas and North Dakota, using it to replace oil from Nigeria, Algeria, Angola and Brazil, and almost every other oil-producing nation except Canada.

OPEC sent the U.S. 180.6 million barrels in August 2008, a month before the first Eagle Ford well; in September 2014, it shipped about half that, 87 million barrels. That is about 100 fewer tankers of crude arriving in U.S. ports. They went elsewhere.

For a long time, it seemed like the world’s growing appetite for oil would soak up all the displaced crude. By 2011 prices began to hover between $90 and $100 a barrel and mostly stayed in that range.

But earlier this year, another trend began to come into focus, catching Wall Street energy analysts and other market watchers by surprise. In March, many analysts predicted global demand for crude oil would grow by 1.4 million barrels a day in 2014, to 92.7 million barrels a day.

That prediction proved wildly optimistic...

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