Global Markets Forum Dashboard No need for oil price panic

The price of oil has tumbled $85 a barrel and is now set for its first yearly loss since the onset of the financial crisis in 2008 as the dollar has strengthened and Chinese data pointed to slower economic growth as well as weaker fuel demand in the world’s biggest energy market. But where does it go from here?

“Down, but not down to catastrophic levels,” said Nick Grealy, director of energy consultancy firm No Hot Air in the Global Markets Forum. “Everyone has an interest in keeping it around $80 a barrel. But they’ll go to $70 soon enough.”

The U.S. dollar index rose to its highest in nearly four-and-half years today, driven by expectations among investors for the Federal Reserve to start raising U.S. interests rates some time next year. Strength in the U.S. currency tends to encourage investors to sell their dollar-denominated commodities for a greater profit in their own currencies.

Meanwhile the Organization of the Petroleum Exporting Countries (OPEC), which controls an estimated 40 percent of world supply and aims to keep oil prices as high as it can, seems to be just fine with falling oil prices. Investors expect OPEC leaders to leave production unchanged, keeping plenty of supply in the markets, when it meets in Vienna later this month.

“OPEC countries are learning to deal with it as in Saudi Arabia, or starting to panic as in Nigeria and Venezuela,” Nick said. “There’s little they can actually do. Increasing production will hurt them more than the U.S. producers.” The International Energy Agency said back in September that North America’s shale oil boom has started to squeeze Saudi Arabian oil out of the U.S. market in the same way it did with West African crude. A cut in Saudi production would probably boost prices, but give U.S. producers more scope to fill any void in supply.

According to a latest survey by Reuters, OPEC’s oil supply in October has fallen by 120,000 barrels per day (bpd) due to lower production in Angola and Nigeria. The survey also indicates Saudi Arabia and heavyweight Gulf producers are showing no sign of deliberately cutting exports to address oversupply and support prices.

Last month, OPEC Secretary General Abdullah al-Badri said he expected OPEC to lower its oil output target when it meets in Vienna on November 27, which would be its first formal output cut since the 2008 financial crisis. OPEC has a production target of 30 million barrels per day (bpd) and Badri suggested this should be cut to around 29.5 million bpd. Iran and Kuwait have said a cut in output at the meeting was unlikely.

Brent crude futures have dropped by 26 percent since June, when they were above $115 a barrel, as abundant supplies of high-quality oil such as U.S. shale have overwhelmed demand in many markets, filling stocks worldwide. But lower prices pose a threat to supply outside OPEC. While OPEC’s oil production costs are low, as much a third of shale output would be under threat if prices remain at current levels.

“Lower prices are good for the economy in Organisation for Economic Co-operation and Development (OECD) countries,” Nick said. “But lower prices can destabilise MENA (Middle east and North Africa). Europe could end up in the worst of both worlds: higher energy than the U.S. and a cauldron the other side of the Mediterranean.”