Friday, 28 November 2014

Oil prices plunge as OPEC holds supply steady

Oil prices crashed below the $US70 mark this morning as OPEC chose to keep its production levels steady despite decreasing demand.

The decision to leave the output ceiling at 30 million barrels per day came before markets closed in the United States for Thanksgiving weekend.

At its semi-annual meeting on November 27, OPEC's secretary general Abdallah Salem el-Badri said that although there was a price decline, the organisation would not “rush to do something”.

"We don't want to panic. I mean it," said Mr el-Badri. "We want to see the market, how the market behaves, because the decline of the price does not reflect a fundamental change."

Saudi Arabia has indicated that the decision is in line with its policies.

The West Texas Intermediate (WTI) benchmark measured the dip as roughly 7% to just below $US69. Brent Crude also fell by 7% but sits slightly higher at $US73.

Stocks in major oil producers also took a beating. Royal Dutch Shell fell 4.3% while Total SA slipped 4.1%.

The Organisation of the Petroleum Exporting Countries resisted calls from member Venezuela to drop production and lift crude oil prices. Venezuela’s currency reserves are already low which is placing pressure on the Latin American economy and government.

The Automobile Association (AA) expects petrol prices in New Zealand to fall again shortly as the effect of the downwards slide reaches this part of the world.

Another few cents could be shaved at the tank if commodity prices continue track the global dip in crude oil costs. Petrol prices have already dropped 14 cents in six weeks.

Oil is now at the lowest cost since May 2010. In July this year, oil prices hovered around $US100 before beginning to fall away consistently to today’s price.

The OPEC decision reflects a widely held sentiment among members that stability in the oil market may be further away than first assumed.

An oil price below $US90 will be a high concern for certain OPEC members such as Nigeria, Russia and Venezuela. Each have balanced a national 2015 budget on an assumed oil spot price ranging from $US90 to $US120.

The Gulf States - including Qatar, Kuwait, Saudi Arabia and the UAE - have a combined rainy-day fund of an estimated $US2.5 trillion in savings which means they do not rely on high crude oil prices.

However, Saudi Arabia’s minimal concern reflects the country’s deeper buffer range, although a consistently low oil price will begin to pinch its economy if it doesn’t stabilise higher next year.

Analysts point to the United States shale and tight oil revolution as a major factor in the reasons behind the low prices.

Other causes include a lower demand from Asia and Europe and a larger global shift towards non-fossil fuel energy sources. The return to the market of significant crude production from Libya and Iraq is also a factor.

Lower prices will favour Gulf States over the long run, as a minimal return on investment may discourage US shale and tight oil producers out of the market.

OPEC also predicts a growth in non-OPEC supply next year which will further pressure the crude oil price.

OPEC accounts for a third of the world’s oil sales.

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