Oil Falls Further on OPEC Output Ceiling

November 28, 2014Commoditiesby EW News Desk Team

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Oil futures fell over 4% in London as OPEC announced it would leave its oil output target unchanged, leading further momentum to the bear market in energy commodities.

OPEC announced Thursday that it would keep steady its output ceiling of 30 million barrels a day, according to Ali Al-Naimi, Saudi Arabia’s oil minister. Brent crude futures fell to less than $75 per barrel, the lowest point since 2010, while the WTI crude fell to $71.34 per barrel.

European equity indices returned gains made earlier the day on the news, although all indices remained positive after the announcement except for the FTSE 100, which turned negative.

Economists worry that slumping energy costs could hasten the turn to deflation in the European Union, as tight monetary policy is combining with slumping money velocity, employment, and consumer spending to cause aggregate prices and incomes to fall.

High Output, Low Demand

Oil prices have suffered from a decline in energy demand worldwide thanks to slower growth in emerging markets and high production in the United States. Once the largest net importer of energy commodities, U.S. oil output is at its highest rate in thirty years as the nation reaches energy independence. Declining demand for imported oil has pressured OPEC, and emerging markets have failed to make up for the shortfall in American demand.

Oil and energy stocks fell immediately on the news, continuing a trend that was aggravated in the United States on Wednesday when Seadrill, an offshore drilling company, announced it would halt its dividend on cash flow issues due to slumping oil prices.

OPEC Power Fades, Russia Squeezed

Growing tensions between OPEC and non-OPEC energy producers is mounting, while some geopolitical commentators note that oil prices has become the victim of a geopolitical strategy targeting Russia, whose economy is heavily dependent on energy exports. United Arab Emirates Energy Minister Suhail Al-Mazrouei said in a conference call “the [energy] market is oversupplied, but the oversupply is not from OPEC.”

Venezuela had urged OPEC to lower production in an effort to raise prices. “Everybody has to make some sacrifice,” said Rafael Ramireze, Venezuela’s representative to OPEC. However, Saudi Arabia has said that the oil market will stabilize on its own over time.

Russia’s economy has fallen into recession after its annexation of Ukraine and subsequent sanctions from the European Union, its largest trading partner. To prop up the domestic economy, Russia has sold off 20% of its foreign currency reserves in an attempt to strengthen the falling ruble. So far, the ruble has lost nearly a third of its value to the U.S. dollar in 2014.

The Russian government has not publicly admitted its currency selloff, which has left the Bank of Russia’s currency reserves at about $370 billion.

Despite the falling currency and shrinking economy, Russian billionaires and policymakers are united in arguing that the trends are going to hurt the U.S. more than Russia. While Putin has publicly denied the foreign currency selloff, Vice President of OAO Lukoil Leonid Fedun said in an interview that OPEC will complete its “objective of cleaning up the American marginal market” in 2016, causing oil prices to rise. He also predicted a bust in the U.S. fracking boom: “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”