Crude extends falls on oversupply fears after OPEC decision

By James Dennis

SINGAPORE (ICIS)–Crude futures fell sharply on Monday, with prices falling by more than $2/bbl at one stage, amid oversupply fears after OPEC decided not to cut  production at its meeting in Vienna on 27 November.

At 05:47 GMT, January Brent crude on London’s ICE futures exchange was trading at $68.40/bbl, down by $1.75/bbl from the previous close. Earlier, the North Sea benchmark fell to a session low of $67.82/bbl, down by $2.33/bbl and the lowest level since 5 February 2010.

January NYMEX light sweet crude futures (WTI) were trading at $64.51/bbl, down by $1.64/bbl from the previous close. Earlier, the US benchmark fell to a low of $64.10/bbl, down $2.05/bbl and the lowest level since 30 July 2009.

Crude oil prices have fallen sharply from highs hit in June this year, with ICE Brent crude futures down 40% since hitting a year high of  $115.71/bbl in June 2014.

OPEC’s decision not to cut production  has  been viewed as a major change in the group’s strategy. Previously, OPEC – Saudi Arabia, in particular – has acted as a swing producer, cutting and sometimes increasing output to combat steep decreases or increases in prices.

The OPEC decision is viewed as a move that will place pressure on high-cost producers and force some out of the market. Much attention has been focussed on the impact of the OPEC move on

US  shale oil producers. However, the International Energy Agency (IEA) has previously reported that only 4% of US shale oil producers require $80/bbl oil.

The IEA has estimated that 82% of US shale oil producers have a breakeven of $60/bbl or less. However, shale oil wells go into a decline in a matter of months after coming online so new drilling is constantly required and low oil price could curb future drilling plans.

Meanwhile, most OPEC oil producers require oil prices above $80/bbl in order to balance national budgets according to data from Deutsche Bank and the International Monetary Fund (IMF).

Indeed, countries such as Venezuela, Nigeria, Iran and Libya need prices well above $100/bbl. Low oil prices are already putting significant strains on these economies, as well as Russia – the leading non-OPEC oil exporter.

OPEC production accounts for around 40% of global oil production. The organisation has a production target of 30m bbl/day, but this target has regularly been exceeded amid increased output from Iraq and a recovery in Libyan production. In October, OPEC crude production was 30.6m bbl/day, according to the IEA.

Global oil production  has risen significantly this year, boosted primarily by shale oil production in the US that has pushed US crude production to the highest level 30 years. 

In its most recent monthly report, the IEA said that global production in October was  up 2.7m bbl/day from the previous year at 94.2m bbl/day.

Meanwhile, global oil demand growth has fallen amid weakness in the European and Japanese economies and a slowdown in China.

The IEA forecasts global oil demand in 2014 will total just 92.4m bbl/day, an increase of 680,000 bbl/day on the previous year. This is the lowest annual increase in demand in five years.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections