Oil prices slide to four-year low as Opec digs in

Brent crude slid below $85 yesterday, marking a four-year low for the commodity, after the International Energy Agency (IEA) predicted that oil demand would expand slower this year than it had since 2009. 

 

In its oil market report for October, the stated that the Organisation of the Petroleum Exporting Countries’ (Opec) crude oil output had surged to a 13‐month high of 30.66m barrels per day in September. The IEA said this increase was due to Libya’s continued recovery and higher Iraqi flows.

 

Many analysts continue to point to overproduction versus sliding demand as the reason for sluggish prices. However, Saudi Arabia and Kuwait have played down the possibility of Opec reducing output when it holds its next meeting on 27 November. Over the weekend, Kuwait’s oil minister, Ali al-Omair, was quoted by state news agency Kuna as saying that prices could continue to shrink until they hit $76 to $77 a barrel, since that was the cost of oil production in the US and Russia.

 

Jonathan Waghorn, portfolio manager at Guinness Funds, told Morning Wire that going back to 2000, there have been about 13 similar retrenchments in Brent prices and commented: “What we have here is nothing out of the ordinary.” 

 

He added: “Forecasting near-term oil prices is a mug’s game. The interesting factor we have seen is if you look at the forward curve four years out, the long-term oil prices have hardly moved.”

 

According to oil futures data on Bloomberg, the five-year forecast for Brent crude’s performance is for growth of 6.7 per cent. Waghorn said: “There’s a storm in the market at the moment, but out in the future the oil market is pretty calm.”

 

Stuart Amor, head of oil and gas research at RFC Ambrian, said most Opec countries could afford reduced prices for another two months, but “eventually Opec will act to support prices, as they have done in the past”.

 

■ Despite oil prices falling in September, Saudi Arabia increased production and sold it at a discount to Asian buyers, which  other Opec members took to mean that they were trying to make sure the oil got away in anticipation of further price falls

 

■ Low oil prices are likely to send shockwaves through the North American shale oil/gas industry, and encourage companies to curtail their investments in the future production, thus slowing production growth there

 

■ If swing producers such as Saudia Arabia and Kuwait want to get the whole of Opec to share the pain of cutting production among its members, they have to show the others the consequences of inaction

 

■ This means letting prices continue to sink – a resolution at the next Opec meeting is unlikely, as one month of pain for the organisation is not a lot of pain – most Opec countries can weather a month or two of lower oil prices 

 

■ Some investors have subscribed to the theory that Saudi Arabia will continue cutting prices in order to hurt Russia, because Moscow is an ally of bitter rival Iran