Business

Oil price predicted to fall to $60 unless OPEC cuts back

Crude prices could plunge to $60 a barrel if OPEC does not agree to a significant output cut when it meets in Vienna this week, according to market players.

Traders say significant cut in production would be needed to boost oil price

Oil prices could dive to $60 a barrel unless OPEC agrees to cut production at its meeting this Thursday. (Larry MacDougal/The Canadian Press)

Oil is again under pressure this week, ahead of a meeting Thursday in Vienna in which the Organization of the Petroleum Exporting Countries will decide whether to cut back production.

Prices could plunge to $60 US a barrel if OPEC does not agree to a significant output cut this week, according to market players.

West Texas Intermediate crude oil trading in New York was down 80 cents Monday, to $75.71 US, and Western Canada Select was down $1.48 cents, to $58.53 US.

Brent crude, the price of half the world’s oil, has fallen 34 per cent since June and on Monday traded at $79.56, down $1.00.

Goldman Sachs predicted last month that WTI could fall to $70 a barrel. Now that the price hovers a little above that level, traders say it is set to go lower.

Daniel Bathe, of Lupus Alpha Commodity Invest Fund, says Brent crude could fall to $60 a barrel if there is no OPEC cut.

“The market would question the credibility of OPEC and its influence on global oil markets if there was no cut,” he said.

No consensus on OPEC decision

There is no consensus over whether OPEC is willing to cut back its production to deal with falling world demand for oil and an increase in oil supply from the U.S. shale boom.

Iran, which has limited access to markets because of sanctions, is believed to want a cut in production, as does Venezuela, which needs a higher oil price to meet its massive debt burden.

But Saudi Arabia, which usually makes the sacrifice to keep the cartel strong, is believed to be increasingly reluctant to cut back, because that would just give other jurisdictions more leeway to boost production.

“OPEC can’t balance the market alone,” former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah told Bloomberg. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”

Half the analysts in a Bloomberg survey last week forecast that OPEC would cut production from its official 30 million barrel-a-day production target, but the other half said a cut was unlikely.

Some investors believe a small cut — of around 500,000 barrels a day — would not be enough to calm the markets. Many believe OPEC will have to cut at least one million barrels to be sure the Brent price would stay above $80.

Prices could fall, even with a cut

Doug King, chief investment officer of RCMA Capital, sees Brent falling to $70, even with a cut of one million barrels.

U.S. imports of crude oil from OPEC nations are at their lowest level in almost 30 years, representing just 40 per cent of U.S. domestic demand. Meanwhile, shale oil production jumped to nine million barrels a day, cutting into crude imports.

“A surprise significant cut, say of two million barrels per day, is needed to push prices back up to $80," said Doug Hepworth of Gresham Investment Management. "And that would have to be accompanied by some new-found discipline in the non-Saudi members.”

Certainly Saudi Arabia has been content to let the oil price slide in the last two months, failing to intervene when Brent slipped below $80 and WTI hit the $75 threshold.

The Saudis met with Russia last week with prices high on the agenda. The falling oil price is costing Russia up to $100 billion a year, its finance minister has said.

The world is oversupplied by an estimated two million barrels a day OPEC estimates, because of declining demand in China, Japan and Europe as their economies slow.

The low prices have hurt the Canadian oilpatch, leading to production cutbacks. A WTI price below $60 would make some oilsands production unviable.

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