Hansen: Risk of further oil weakness as Opec retains old quota
- Opec — the market will decide oil price
- Old quota of 30 million barrels a day is kept
- Members express satisfaction in united front
- Click here for closing statement in full
By Clare MacCarthy
Ole Hansen, Saxo Bank's head of commodity strategy, said there's a near-term risk of further weakness in oil prices following Opec's decision today to maintain the status quo and retain its old production cap of 30 million barrels a day.
"Much depends, of course, on how much is already priced in to the market. But in any case we should watch marginal shale oil producers in the US as the ill-effects of continued low prices begin to be felt there," he added.
Over recent days, as conviction that it would pursue the former course spread through the market, the price of oil fell and fell again. Earlier today ICE January Brent tumbled $2.27 to $75.48 a barrel – a four-year low – while Nymex West Texas Intermediate was down $1.48 to $72.19/bbl.
The decision against decisive action to curb supply exacerbates the fiscal predicament of the weaker Opec members as well as that of non-Opec producers, such as Russia and Norway, whose currencies have already weakened as their oil revenues shrank.
Within Opec, today’s events leave Venezuela, Iran and Libya in particularly difficult circumstances. According to Deutsche Bank, the South American country would need a price of $117.50/bbl in order to balance its 2015 budget.
Algeria, which has significantly increased social spending in the aftermath of the Arab Spring, has long been a cheerleader for higher oil prices — hardly surprising given that its state budget breakeven level for next year is $130.50.
Both, however, pale in comparison to Libya which is still reeling from the shock of its revolution and must now contend with IS militants as it tries to rebuild its shattered society and infrastructure. It would need a staggeringly high $184.10/bbl next year to balance the books.
But the repercussions could be even deeper outside the Opec zone — particularly in Russia. The West’s sanctions in retaliation for Russia’s Ukrainian incursions have triggered a sequence of events that has undermined the ruble. State coffers are emptying fast and the outlook to any rapid resolution seems remote.
As Nadia Kazakova suggested in a feature article on TradingFloor.com earlier today, Opec’s decision could be seen as a strategic move by the Saudis to eat into Russia’s global market share. If successful, this tactic (which could also impede the United States’ new-found shale success) could give the Opec countries a leg back up towards the virtual monopoly control of international oil markets they’ve enjoyed since the 1970s.