Oil continues to face downward pressure from oversupply, with no indication of Opec cutback
The price of Brent crude oil has fallen to below $80 a barrel, marking a fresh four-year low.
ICE December Brent, the global oil
benchmark, is now $77.52 a barrel, 30 per cent below its June price. West Texas Intermediate, the US benchmark, is also at a four-year low after closing at $74.28.
Analysts say that crude oil is facing downward price pressures from oversupply, yet Saudi Arabia – the biggest oil exporting nation in the world – has signalled that it is not interested in taking action to cut back on production.
Members of Opec (Organisation of the Petroleum Exporting Countries), which controls 40 per cent of world oil exports and includes Saudi Arabia, are due to meet later this month to discuss the global oil market.
Most of these nations need higher oil prices to fund rising government spending, so tend to limit their output and supply when prices are low in order to boost prices and income, says the BBC.
But despite the fall in oil prices, traders believe member
nations will not cut production. Saudi Arabia's oil minister, Ali al-Naimi, has said that talk of "price wars" has been "misinterpreted", but kept quiet on whether the kingdom has any intention of limiting its supply.
Some industry observers believe Saudi Arabia is allowing prices to fall to drive down production from US shale rivals, says the Financial Times. Others believe it is trying to undermine Russia and Iran, whose governments are more dependent on higher oil prices.
JPMorgan has warned that, in "extreme circumstances", Brent could reach $65 a barrel. "We believe that Opec will fail to agree to sufficient output cuts at its 27 November meeting and this will put further downward pressure on the oil price," it said in a report earlier this week.
The report claims Opec needs to reduce its supply by one million barrels a day in the first quarter of next year to avoid excessive stock builds.
Oil price: Opec 'may act to shore up falling prices'
Oil prices continued to tumble this morning as the impact of Saudi price cuts for US customers sent further shockwaves through the market, but some top oil traders predicted that Opec could vote to cut production in a bid to prop-up prices.
Brent crude, the global benchmark, dropped 0.9 per cent to $82.11 on Wednesday, reaching the lowest levels seen since November 2010. West Texas Intermediate, the US benchmark was also affected, falling yesterday to its lowest levels since October 2011 with a reduction of 0.8 per cent to $76.60.
The price drops were triggered by Saudi Arabia's announcement of its official December selling prices on Monday night. The market was reassured by the raised prices for Europe and Asia, but "the calm did not last long," the Financial Times says. "The decision to cut price differentials for US seized upon on Tuesday as evidence that Saudi Arabia had taken its imagined fight for market share across the Atlantic to North America".
The upshot of the Saudi announcement was a "skittish" market, with many traders looking to sell immediately.
"It's a case of sell first, ask questions later for anything oil-related," Quincy Krosby, a market strategist at Prudential Financial told the New York Times. Olivier Jakob from oil consultancy Petromatrix, told the FT that prices will rise only if Saudi Arabia and Opec take action: "The only solution seen by the market to reduce the oversupplied outlook is an Opec cut led by Saudi Arabia."
Opec is scheduled to meet in Vienna on 27 November, when the group is expected to discuss its response to falling oil prices with some countries calling for a cut to production to push prices back up towards the $100 per barrel mark.
Many analysts have expressed doubt that the 12 members of Opec would vote to step in and support prices, but some independent traders, including top executives of Vitol, Gunvor and Mercuria, said that cuts in production may in fact be possible: "My feeling is we're underestimating now the possibility of Opec cutting," Ian Taylor the chief executive of Vitol said at the Reuters Commodities Summit. "Everybody says they are not going to cut, and I'm not 100 per cent sure. I think there will be serious discussions at the Opec meeting about cutting."
Oil price plunge leads to Russian downgrade
Lower oil prices will lead to a contraction of Russia's economy next year, according to a leading investment bank.
"The Russian economy is heavily reliant on oil revenues, with energy and energy-related production amounting to a substantial share of total economic output, half of the federal budget revenues and almost two-thirds of export revenues," Deutsche Bank's research team said in a note to investors.
"Thus, lower oil prices lead to a downgrade to Russia's growth profile for the next several years," it said.
Oil prices tumbled again this morning, after Saudi Arabia announced that it was cutting its contract price for crude oil to US customers. Brent crude fell almost immediately by 2.5 per cent to $82.62 in mid-morning trading in London.
Gene McMillian, a senior analyst at tradition Energy in Stamford, Connecticut told Reuters that the impact of falling prices could be profound: "The market continues to hunt for a bottom," he said. "There is more than ample supply, no producers seem willing to cut back, there are fears Europe could fall into recession and China's growth is continuing to slow."
Opec is expected to publish its annual World Oil Outlook paper on Thursday, in which it will detail its projections for the future of the oil industry.
After the Saudi announcement, a Commerzbank spokesperson told the Daily Telegraph that country's actions seemed to be an escalation in the global energy war.
"Apparently Saudi Arabia is now concentrating more on defending its market shares on the US market, which could pose a problem in particular for Canada, Mexico and Venezuela [who all supply oil to the US] and for US shale oil producers," the Commerzbank spokesperson said.
"With just three-and-a-half weeks to go before Opec's meeting, however, Saudi Arabia does not appear willing to curb its supply. This makes it rather unlikely that any agreement to jointly reduce production will be reached on 27 November and suggests that pressure on oil prices will persist."
The downward pressure on oil prices poses a particular problem for the Russian economy.
According to the Daily Telegraph, "the Kremlin depends on oil as its main source of foreign currency earnings, and petroleum industries including gas account for about 46 per cent of Russian budget revenues."
Yesterday Deutsche Bank also lowered its forecast for Brent Crude, predicting an average price of $89 to $90 per barrel until 2018. It also brought its long-term estimate down from $105 to $90 per barrel.
The price of Russia's main export blend of oil – Urals – is linked to that of Brent.
As a consequence of these lower than expected oil prices, the German investment bank predicts that Russia's economy will contract by 0.2 per cent next year.
However, it says that the contraction will be shortlived: the Russian economy will record a modest growth rate of 0.8 per cent in 2016, it says.
In spite of western sanctions, Russia has kept oil production high, pumping an average 10.6 million barrels per day last month, Reuters says. The figure compares with Saudi Arabia's October output of 9.65 million barrels per day.
Russia, Ukraine and the European Union managed to strike a deal over the delivery of gas last week after Moscow had cut off supplies to Ukraine in June. As soon as Kiev pays $2.2 billion in debt and pre-payments, natural gas deliveries are expected to resume, which could be as early as this week.
Oil price falls: don't panic, says Opec secretary general
The secretary general of Opec has insisted that there is no need to panic over the recent drop in the oil price, which he said would help to curb competing suppliers.
Abdullah al-Badri said shale gas and other more expensive sources of energy would struggle to compete with cut-price oil, and demand would therefore increase for oil from Opec countries.
"If prices stay at $85, we will see a lot of investment, a lot of oil, going out of the market," Badri said at the Oil & Money conference in London. "About 65 per cent of the producers, they have high costs. Not OPEC."
Badri did not comment on whether Opec might cut oil production when it meets in Vienna on 27 November, nor on how low he felt oil prices could fall, Reuters reports.
Despite the substantial fall in the oil price, which has dropped by a quarter since June, Badri said that many in the industry were guilty of overreacting.
"The most important thing is we should not panic," he said. Unfortunately, everybody is panicking. We really need to sit and think and see how this will develop.
"We do not see much change in the fundamentals. Demand is still growing, supply is also growing.
Brent crude was trading at $87 just after midday GMT (8am EDT) after hitting a four-year low of $82.60 two weeks ago.
Oil price plummets: who are the winners and losers?
Brent crude fell below $86 a barrel today after investment bank Goldman Sachs dramatically cut its oil price forecasts for 2015.
That news will add to the misery for oil-producing countries, but other nations have been buoyed by falling oil prices. Here are some of the biggest winners and losers:
Oil price winners
Turkey: Those who stand to benefit the most from the fall in oil prices are the large net importers of oil and countries with high inflation rates, The Guardian says. Turkey falls into both of these categories.
The country's energy import bill last year of roughly $50 billion was approximately equivalent to its 12-month running current account deficit, the Financial Times says, so falling oil prices will be a boon for public finances.
However, most analysts agree that the Turkish economy will require more than just lowered oil prices to stage a full recovery. The recent price drops come as "a balm rather than a cure," the FT says.
China: After the US, China is the world's second-largest net importer of oil, according to Business Insider, and every $1 drop in the oil price saves China $2.1 billion per year.
The recent fall, if sustained, lowers China's import bill by $60 billion, or 3 per cent, but the BBC says lower oil prices "won't fully offset the far wider effects of a slowing economy".
Ukraine: According to analysis by Quartz, Ukraine will benefit the most from falling oil prices. Given the country's "entanglement with a resurgent Russia", the country stands to reap a geopolitical as well as a financial advantage from $80-a-barrel prices, which will hurt the Russian economy and may limit its appetite for further military adventures.
Still, Ukraine faces a difficult winter due to shortages of coal as well as oil, OilPrice.com notes. Of the country's 93 operational coal mines in the Luhansk and Donetsk oblasts, 88 are in areas controlled by pro-Russian separatists.
Oil price losers
Russia: There are "very big risks" that Russia could be pushed into recession if oil prices remain close to present levels, the Moscow Times reports.
"This is of course very serious," Alexei Ulyukayev, Russia's economic development minister, has said.
Russia is also facing the bill for its annexation of Crimea in March and its suspected involvement in Ukraine, where fighting between pro-Russian separatists and Ukrainian forces continues. Crimea's infrastructure and development alone will cost the Russian budget up to $4.5 billion a year, according to the Ministry of Economic Development.
European and American sanctions are also curtailing the Russian economy.
Earlier this month, Finance Minister Anton Siluanov said that falling oil prices and geopolitical developments have already cost the Russian budget 4 per cent of its GDP, USA Today reports.
Iran: Last week, Iran accused fellow Middle Eastern Muslim countries of conniving with the West to bring down oil prices in a bid to further undermine its economy.
President Hassan Rouhani's administration has been "scrambling" to find alternative sources of income for 2015, Reuters reports, as its budget projections for 2015 had been based on an oil price of $100 per barrel.
Venezuela: The falling prices have also triggered fears over Venezuela's troubled economy. Problems in the country have forced president Nicolas Maduro to slash imports to cover foreign debt payments in a bid to bring an end to shortages within the country that include "almost everything, from toilet paper to medical supplies," the Financial Times says.
Oil price falls raise concerns about fracking costs
The tumbling price of oil worldwide is causing US shale oil and gas suppliers to look for ways to drive down their production costs.
Even before oil prices began to fall, many small and mid-sized shale exploration and production companies were running large cash deficits, the Financial Times reports. If oil prices continue at their current levels, up to 25 per cent below June levels, it may be hard for many of them to make ends meet.
The key to their ongoing viability, however, may be in bringing down their productions costs. One successful shale oil producer, EOG Resources, cut its production costs per well in the Leonard shale on the border of Texas and New Mexico from $6.9m in 2011 to $5m this year. Simultaneously, the company managed to raise the average productivity from each well.
Due to such advances, some analysts believe that oil prices may need to fall further before they hurt the US shale industry.
"In the face of falling global and US crude oil prices, a key question becomes: how low would WTI prices [a Texas benchmark] have to go to meaningfully slow down US shale production growth?" Citi analyst Eric Lee told the Sydney Morning Herald.
"To bring US shale production growth to zero... might need prices ranging from $US40-60 per barrel," Lee said.
Still, while the prospect of disaster for the shale industry seems unlikely, it seems increasingly possible that falling oil prices could lead to cutbacks.
Scott Sheffield, chief executive of Pioneer Natural Resources, a leading shale oil producer, said last week that there would be a "significant cutback" in drilling if WTI prices fell below $70, and there would be "some cutback" even at $80.
With prices hovering just above that level at the moment, some cuts seem increasingly likely.
Oil price: can Russia cope with further falls?
The declining oil price, which has fallen by 25 per cent since June, has plunged Russia into economic uncertainty, analyst say.
It is also leading to financial anxiety in other petro-states such as Venezuela and Iran.
Oil and gas make up 70 per cent of Russia's exports and half of the federal budget, so the price drop from $100 to $80 a barrel is likely to cause a shortfall of about two per cent of the country's GDP, the Financial Times says.
With economic growth in Russia already sluggish and sanctions imposed by Europe and America taking effect, further drops in the price of oil could be very costly for the country.
Already, the Moscow stock market has dropped by more than 20 per cent since the summer, The Guardian reports, and Russia's central bank is now said to be working on a "shock scenario" of oil prices falling as low as $60 a barrel.
Experts say that even in that scenario the country would not run out of cash until 2017, but the greater concern to Vladimir Putin will be the stagnation, if not decline, of real incomes.
Lower oil prices result in a weaker rouble, which "will undermine the purchasing power of Russian consumers in real terms," the FT says. Since Russia is a net importer of food and consumer goods, "overall prices can be expected to increase".
Putin may also have to curb his military ambitions, the Washington Post suggests. The Kremlin's finance minister warned this month that Russia can no longer afford its ambitious ten-year defence spending plan.
So how will Putin react? If recent events are any indication, the Russian president will respond "by convincing the public that they are in a besieged fortress and must rally around the flag whatever the cost," the FT says.
"This will require raising propaganda and political repression to yet another level – and may involve even more unpredictable foreign policy choices".
US oil prices rebounded from intraday losses yesterday to finish the day nearly flat, but concerns remain that the market still looks oversupplied.
Oil prices have been in decline for nearly four months, but Tuesday's $4 plunge was the biggest drop in more than two years.
Driving the freefall has been a combination of oversupply, slowing demand, a stronger US dollar and continued inaction from Opec, Fortune reports.
On Wednesday, the US benchmark fell to $80.01 a barrel on the New York Mercantile Exchange. It then rebounded before wavering between gains and losses and finally settling down 6 cents, or 0.1 per cent, at $81.78 a barrel – the lowest level since 28 June, 2012, the Wall Street Journal reports.
"People are definitely concerned about both the supply and demand side of the equation," Adam Wise, managing director at John Hancock Financial Services told the Wall Street Journal.
As global oil prices have fallen, Saudi Arabia is "emerging as a central player," says the New York Times, accused by some of allowing prices to fall to weaken rivals including Iran and US shale gas producers, but looked to by others as "the only hope of ending the rout".
The falling prices have also triggered fears over Venezuela's deteriorating economy. Problems in the country
have already forced the president Nicolas Maduro to slash imports to cover foreign debt payments in a bid to bring an end to shortages within the country that include "almost everything, from toilet paper to medical supplies," the Financial Times says.
Moisés Naím, senior associate at the Carnegie Endowment for International Peace in Washington, told the paper: "It is hard to believe, but there are worse shortages in Venezuela than there are in Syria".
Opec has so far refused to respond to Venezuela's requests for an emergency meeting. The group's next scheduled summit with be in Vienna on 27 November.