Quicktake: Why are oil prices plunging?

Marco Green
November 15, 2018

The Opec+ alliance may cut its output by up to a million bpd next year, if needed, to balance the market, Saudi Oil Minister Khalid Al Falih said this week. Both benchmarks are now trading firmly in bear market territory, having fallen more than 20 percent from their 52-week highs.

The slump in spot prices has turned the entire forward curve for crude oil upside down.

Oil erased losses amid renewed speculation that OPEC and its allies are considering curbing supply next year. That came after reports that Saudi Arabia was considering a production cut at the December OPEC meeting, on increased alarm that supply has started to outpace consumption. The contract fell 1 per cent earlier on Wednesday and sank 7.1 per cent in the previous session, the biggest one-day decline in more than three years.

"It's like a run on the bank". He told the Straits Times that "it's getting to the point where it doesn't seem to be about fundamentals anymore, but a total collapse in price". USA crude has lost 28 percent since its early October peak. It now sits at levels not seen since March.

The Opec+, as the alliance is called, cut output by 1.8 million barrels of oil per day starting January last year up to May this year to lower oil inventories and shore up prices, which plunged to less than $30 a barrel in the first quarter in 2016. A total cut was estimated at total of 1.8 million barrels per day, while non-OPEC states pledged to jointly reduce oil output by 558,000 barrels per day, with Russian Federation pledging to cut production by 300,000 barrels.

Rising output in U.S. shale oil has also taken its toll.

The agency said that lower prices "are clearly a benefit to consumers", especially those in developing countries who are seeing higher fuel prices due to weak national currencies.

Alongside this, much depends on not only OPEC's actions but also Russian Federation and the USA, who are both producing at record levels, particularly as demand is seen dropping for OPEC oil.

Consequently, this implies that a production cut may do little to restore prices if Russian and U.S. production continues to pump at record levels, while demand also falters.

Together with Russian Federation and other non-OPEC producers, OPEC had agreed in June to boost supply after pressure from U.S. President Donald Trump to lower prices, partially unwinding output cuts that began in January 2017.

Other reports by Click Lancashire

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