Oil prices have dropped by 27 percent since last June, the lowest in four years on a combination of weak global oil demand and a supply glut in the North Atlantic, the National bank of Kuwait (NBK) report said.
The report, issued on Friday, added that the OPEC will meet on 27 November to discuss its strategy and output targets, amid discussions focusing on the factors responsible for the current bear market, the negative implications for oil producers, many of whom are concerned about fiscal sustainability in the context of ballooning current spending and ambitious capital spending plans.
Outside of the oil producers, however, for oil-importers and the global economy more generally, the impact of lower oil prices could be broadly positive, the report expected. A fall of USD 10 per barrel in the price of oil is thought to transfer approximately 0.5 percent of global GDP from oil exporters to oil importers through greater purchasing power and hence consumer spending.
It also expects an annual windfall of USD 660 billion in savings to be on the cards for the world economy, which could help resuscitate global economic growth next year. However, if lower oil prices are more of a symptom of a weak economy, then output gains may be negligible as consumers in economies grappling with debt overhangs and continued financial weakness, such as in the Eurozone, opt to pay off their debts rather than increase their spending, it states.
According to the report, the price of Brent crude, the international oil benchmark, has fallen by almost USD 32, or 27.6 percent, to USD 83.5 by 17 October, after it hit its highest at USD 115 when the threat to Iraqi oil supplies seemed most acute.
Similarly, WTI, the US benchmark for light, sweet crude, also dropped, by USD 24.5 or 22.8 percent to USD 82.8, the NBK report said, noting that in the absence of a material impact on crude supplies by geopolitical events in Iraq and Ukraine, for example, the decline in oil prices has largely been attributed to weaker-than-expected demand in Europe and Asia coupled with excess supplies in the North Atlantic basin.
On the demand side, global economic growth has been weak during the first half of 2014. Japanese and German GDP fell in Q2 of 2014, while China’s growth, despite a strong showing in the same period, looks set to moderate in Q3, the report said.
As such, the IMF, in its recently published World Economic Outlook, cut its projection for global growth in 2014 for the third time, to 3.3 percent. The forecast for 2015 is only slightly better at 3.8 percent. The report also said that with weaker growth translating as lower energy demand, the International Energy Agency (IEA) has, for the fourth consecutive month, revised down its projections for global oil demand growth in 2014 and 2015-by a sizeable 600,000 barrels per day (b/d), or almost half, this year and by 300,000 b/d for 2015.
The agency now estimates global oil demand will grow by 700,000 b/d to 92.4 million barrels per day (mb/d) in 2014 and by 1.1 mb/d to 93.5 mb/d in 2015.
Oil markets have also been affected by a surplus of crude, especially of the light, sweet variety, in the North Atlantic basin, the report states. This has largely been driven by non-OPEC supplies, especially US, where surging production from unconventional sources such as shale/tight oil helped total oil output reach a 28-year high of 8.5 mb/d in July.
With a surfeit of light, sweet crude in the US, imports from the US’s traditional suppliers, such as Algeria, Angola and Nigeria, have been effectively backed out of the country, declining by more than 50 percent over the last 10 years, the report said.
The report noted that it is natural that developments in the markets pose a challenge for OPEC, which, in its traditional capacity of market balancer, is faced with the prospect of cutting production over official current levels of around 31 mb/d by at least 1.7 mb/d over the next year in order to meet demand and support prices. However, it explained, it is not clear if OPEC has either the intention to make such dramatic cuts or the ability to effect a considerable increase in prices back to above the USD 100 per barrel comfort level.
OPEC Secretary General, Abdulla-Al-Badri, had mooted the possibility last month of production cuts of around 500,000 barrel per day, but swing producer Saudi Arabia is thought to be unwilling to consider unilateral cuts.
Other reports suggest that Saudi Arabia may opt to play a waiting game in the expectation that some production will eventually be curtailed due to geopolitics etc. or perhaps, more self-servingly, by a sustained period of lower prices which would prove cost-ineffective for producers in unconventional shale plays and hence choke off further investment in these regions.
However, according to CITI analysts, prices would need to drop below USD 80 per barrel for some shale plays to be affected and below USD 50 per barrel to make a more substantial dent in North American production from shale/tight oil deposits.
The drop in oil prices has focused attention on the issue of fiscal sustainability, especially for the Gulf Cooperation Council (GCC) oil producers., where ambitious public investment and burgeoning spending by regional governments have seen budget breakeven (BBE) oil prices, the price of oil that is needed to balance the budget, rise in recent years, the NBK report said.
Kuwait, Qatar and the UAE are the three GCC countries with BBEs still below the current price of oil.
With fiscal buffers in the form of substantial foreign assets for many of them, GCC countries should be relatively well placed to weather any sustained drop in oil prices in the short to medium-term, the report concluded.
Source : KUNA Kuwait News agency
