Oil prices continue downtrend, dip below US$90 mark

10-Oct-14

Brent benchmark fell to US$89.4 - about 22% lower than its 2014 peak of $115.71 on June 19. The continued downtrend in oil prices can be attributed to Saudi Arabia's unremitting quest for market share. As per Reuters, this is good news for the global economy at a time of fears of a renewed contraction. US and European GDP could get a lift if oil prices stay this low for a while. Prices could remain low amid projections of a continuing US oil production surge in 2015. Andrew Kenningham of Capital Economics tells Quartz that the US$25/barrel drop, if it lasts through all of 2015, would boost US GDP by 0.5% as motorists apply the savings toward other kinds of consumer spending. However, analysts are split as to whether relatively low prices will persist. Some say OPEC will reduce its own production—perhaps as early as its next scheduled meeting, on Nov. 27 in Vienna—and thus undercut the US supply surge and send prices back up. However, others say we are in the midst of a price crash. Philip Verleger, an independent oil analyst in Colorado, says that crude oil prices have experienced a more than 30% drop 11 times since 1981, on each occasion because of sluggish global economic growth and increased production from a source outside OPEC. “The same elements are present today,” Verleger says. Oil prices have averaged over US$100 a barrel for three years running because of fears about global scarcity, but international energy agencies are forecasting another spike in US oil production next year, to 9.5 mln bpd, which would be 11% higher than this year’s mln bpd surge. The US no longer needs oil from West Africa; that supply has been diverted to Asia, where it’s collided with crudes from Saudi Arabia and Iran, both of which have cut prices to retain market share. Phil Flynn of the Price Group says oil can go lower still. “Iran is lowering its oil prices after the Saudis did it, and Russia is raising production. If stock prices continue to fall, oil could crash to $85 Brent. Prienga’s Steven Kopits said, “Supply is outpacing demand. I think it’s likely to fall more before it corrects.” Saudi Arabia is said to need US$92/barrel of oil to meet its state budget, while Russia requires between US$100 and US$117 a barrel.