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Oil Prices Sink to 6-Year Low

Oil Prices Sink to 6-Year  LowOil Prices Sink to 6-Year  Low

Oil renewed its decline on Monday, dropping below $49 a barrel as Goldman Sachs slashed its short-term price forecasts and Persian Gulf producers showed no signs of curbing output, Reuters reported.

The price of a barrel of the North Sea benchmark dropped by 3% to $48.54, its lowest level since April 2009, having fallen for seven straight weeks on a growing supply glut. The February Brent contract was down $1.33 at $48.78 a barrel on Monday afternoon. US crude oil for February was down $1.20 at $47.16 per barrel.

Analysts at Goldman Sachs cut their three-month forecasts for Brent to $42 a barrel from $80 and for the US West Texas Intermediate contract to $41 from $70 a barrel. The bank cut its 2015 Brent forecast to $50.40 a barrel from $83.75 and US crude to $47.15 a barrel from $73.75.

Production from North American shale companies has increased the supply of oil and gas, helping to depress prices. Also undermining the price of oil are slowing global economic demand and a rising dollar against a range of other currencies. The latter can flatter the oil price, which nonetheless can remain the same price in a local currency that buys fewer dollars.

Despite declining investments in US shale oil, the main driver in the current supply glut, production will take longer to come down, Goldman said in a report. "To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer," the analysts said.

Speaking to Reuters Global Oil Forum, Commerzbank analyst Carsten Fritsch said he expected output cuts to start impacting prices in the second half of 2015. "At some point market participants will realize that a lot of oil will leave the market if prices stay low," Fritsch said.

Oil Talks

As OPEC's November decision not to curtail production in the face of falling prices piles pressure on some group members, Venezuelan President Nicolas Maduro met Saudi Arabia's Crown Prince Salman in Riyadh on Sunday as part of a diplomatic tour in the Gulf to discuss falling oil prices. On Saturday Iran vowed to help Venezuela stem the oil price fall.

However, Saudi Arabia, the world's biggest oil exporter, has said it won't support prices by cutting production and ignored calls from smaller members of the Organization of the Petroleum Exporting Countries (OPEC), including Venezuela, to react to falling oil prices at the cartel's November meeting.

In another development dampening the oil price, two fires broke out over the weekend at refineries in Ohio and Pennsylvania, which will not now be able to process their normal flow of crude oil.

There were signs over the weekend that OPEC's stance may be shifting, after fellow member Venezuela said in a statement it had agreed with Saudi Arabia to work for a recovery in the oil market and oil prices "with state policies" from the two countries.

However, this statement gave no details as to how this would be achieved, and would mark a change in policy for the world's biggest oil producer, which ignored pleas from its fellow cartel members to reverse the slide in prices.

Certain business sectors are expected to benefit from the situation. Airlines are one obvious industry. On Monday, Lufthansa said it expected its fuel bill for this year to be 13% lower than previously forecast, as a result of the low oil price.

 

Financialtribune.com