Article / 27 November 2014 at 15:44 GMT

Hansen: Risk of further oil weakness as Opec retains old quota


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.

Opec's decision, which is seen largely as a result of Saudi Arabian pressure, has negative implications for poorer member states in particular. However, members expressed satisfaction at the cartel's "unity".

Ecuador
 Ecuador's energy minister expressed satisfaction with Opec's "unity" — 
but the result could have been better for poorer nations like his. Photo: Opec

Oil prices have plunged by more than 30% since June because of a boom in US shale oil production and weaker demand due to slower economic growth in China and Europe.

Opec’s announcement today to “let the market decide” and maintain its old quota of 30 million barrels a day in oil output came after protracted speculation worldwide as to whether the cartel would acquiesce to Saudi Arabian demands to keep the oil flowing or whether it would bend to the requirements of its less wealthy members who need production cuts and higher oil prices to shore up their budgets.

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.


opec

 Opec's 12 members met, talked and — did nothing. Photo: Opec website
 
Speaking at the opening of today's session, Abdourhman Ataher Al-Ahirish, Libya's vice prime minister and president of the Opec conference, pointed out that since the group last convened that the global economic recovery has continued, although at lower levels, while the global oil market has seen ample supplies.

Given this backdrop, he added, global economic growth in 2015 is expected to expand to 3.6 per cent from 3.2 per cent in the current year.

In line with this economic outlook, world oil demand in 2015 is forecast to grow by around 1.1 million barrels per day, with total world consumption at around 92.3 million barrels per day, the minister concluded.


Clare MacCarthy is deputy editor at TradingFloor.com — the home of social trading
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Clare MacCarthy Clare MacCarthy
Extra from the FT: The price of Brent crude fell dramatically on the news. ICE January Brent – the international oil benchmark – dropped to a fresh four-year low of $71.25 a barrel, down $6.50.
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Martin O'Rourke Martin O'Rourke
This will be sending a massive shiver through oil-price dependant economies. USDRUB was at 48,5826 at 1659 GMT, up 3.24%
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Martin O'Rourke Martin O'Rourke
48.5826 that is of course
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nelsenkoff nelsenkoff
This comment has been redacted
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LION KING LION KING
EUR/RUB goal 91

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