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Energy Insights: Energy News: Oil prices keep falling as fears of supply glut grow

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Oil prices keep falling as fears of supply glut grow



Saudi Arabia gives little sign it will cut production despite Brent crude falling close to $51 a barrel

Russia oil
Data over the weekend showed that Russia’s 2014 oil output hit a post-Soviet-era high. Photograph: Maxim Zmeyev/Reuters

Oil prices sank to hit their lowest point in five and a half years on Tuesday as worries as a global supply glut intensified.

Brent crude fell by 3% to below $52 a barrel, as cuts to monthly oil selling prices for European buyers by Saudi Arabia heightened worries about oversupply. US crude was at $48.54, down $1.50, after falling to $48.47, its lowest since April 2009.

Saudi Arabia’s King Abdullah, in poor health last week, said the country would deal with the challenge posed by lower oil prices “with a firm will”, but gave no sign the world’s top exporter was considering changing its policy of maintaining production in the face of fast-growing US shale supplies.

“We would need an indication that Saudi Arabia is considering output cuts,” said Carsten Fritsch, a commodities analyst with Commerzbank.

Despite the oversupply of oil, major oil-producing nations led by Opec are refusing to cut production. Fears are increasing that lower oil prices could lead to economic instability.

Venezuela, in particular, has already suffered from the falling price of oil. Close to 96% of the country’s export revenues come from oil, and investors are worried that without that key revenue, the country may default on its bonds. Its president, Nicolás Maduro, is to visit China and the Opec countries in an attempt to raise money. Maduro recommended last year that oil-producing nations cut their production, but none took him up on his recommendation.

Last month, Opec reportedly sought to cut production but failed to convince other major oil-producing nations, including Russia, to follow suit. Later, Saudi officials called the continuing production of oil by non-Opec nations “irresponsible”.

As a result, nations continue to pump out oil and oil prices are dropping to levels that prove dangerous to several economies, including that of Venezuela, which relies almost entirely on oil to support its spending.

Data over the weekend showed that Russia’s 2014 oil output hit a post-Soviet era high, and exports from Iraq, Opec’s second-largest producer, reached their highest since 1980. Russia and Iraq appear fearful of cutting production and losing their share of the oil market.

“Saudi Arabia is showing no signs of pulling back,” said Bjarne Schieldrop, chief commodity analyst with SEB in Oslo.

A slew of factors was keeping up the downward pressure on prices, analysts said, pointing to concerns about the Greek economy, high oil output from Russia, Iraq and the United States, and a stronger dollar.

“The weak euro should be one of the reasons,” said Tamas Varga of PVM, adding: “When the Saudis are cutting prices, the markets are not going to go higher.”

A rise in the dollar index for a sixth straight month in December has made dollar-denominated oil more expensive for holders of other currencies, depressing prices.

US commercial crude oil and products stockpiles were also forecast to have risen in the week ending 2 January, a preliminary Reuters survey showed on Monday, which could weigh further on prices.

Some economists expect cheaper oil to boost consumers’ purchasing power and buoy the global economy, but the more-than-50% plunge in oil prices since June has also raised deflationary fears.

“This is great news for motorists, but it presents a headache for policymakers, with the Fed keen to get their policy settings back to something more normal, and Europe keen to avoid a deflationary spiral,” ANZ analysts said in a note.

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