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Last friday, price of Brent Crude, which is still seen as a benchmark for the crude oil that India uses, hit a low of $75.3 per barrel and is now trading around $79. The price is now one-third of its high seen in June this year. However there are indications that crude oil has seen a bottom at least for the time being
Here are 5 reasons why crude prices may not go down further.
1) According to T. Gnanasekar Director, CommTrendz, technical charts suggest Brent crude has found a bottom. "Though the Friday's rebound was mostly a short-covering and profit-booking one, there are chances that prices might have bottomed out for the time being,” says Gnanasekar.
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But to sustain above the technical levels, a commodity requires some demand coming in or a fundamental support. Gnanasekar says that some support may come in due to the onset of winter.
2) However on the supply side, there could be a possible production cut by the Organization of the Petroleum Exporting Countries (OPEC) which is meeting on November 27. Earlier, OPEC used to say $100 is the safe price below which it will intervene in the market. However, that has not happened yet as slowdown in major consuming countries like China and Euro Zone have hurt demand sentiment.
Price fell below OPEC’s own benchmark of $100 as stronger OPEC members were talking down the prospect of a cut in output quotas. However, Natixis Commodities said that, “It is rapidly becoming evident the extent of the potential damage that lower oil prices might wreak upon weaker OPEC members.” Perhaps this could force OPEC to ultimately announce production cut.
3) Within OPEC members, Natixis analysis show members like Kuwait are not worried about lower prices and are therefore talking down a price cut. However, Nigeria’s 2014 budget is predicated upon output of 2.39 million barrels a day (MBD) at a price of $77.50/bbl. Its output is running below the target and if the price remains lower, its budget will go haywire and hence the country is in favor of a price cut. Venezuela is repaying its international debt especially to China also in the form of crude oil and lower price affects its debt repayment. Crude oil forms 50% of Ecuador's exports and falling prices will hurt its economy badly.
4) While all these countries will bat for production cuts to stem falling prices, at some point, lower prices will also affect new projects. So far no reports of dropping new big exploration projects due to falling prices have come. BP and Total, major players in this field, have both indicated that they will push ahead with existing projects, even at $80/bbl. BP’s Bob Dudley was last week quoted as saying that lower oil prices would impose greater discipline on the oil industry.
5) The International Energy Agency echoed these comments, suggesting that $80/bbl oil prices would result in a 10% fall in US investment in tight oil in 2015. OPEC ’s Secretary General El-Badari is seeking to find a balance bêtween interest of producers and new investments. He had indicated that, “OPEC is looking for a reasonable price, at which producers and consumers can live together", a position that has found support from the United Arab Emirates (UAE).
