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Oil at multi-year low as OPEC retains market share strategy

FXStreet (Mumbai) - Oil has plunged to multi year lows after OPEC in its meeting on Friday decided to stick to its policy of pumping record volumes, disregarding the global oil glut concerns. OPEC decided to produce closer to 31.5 million barrels a day as against the earlier production ceiling of 30 million barrels a day. Analysts have concluded that the decision essentially legitimizes the cartel’s overproduction. Clearly, OPEC’s decision could not attend the growing supply side concern. Bjarne Schieldrop, chief commodities analyst at SEB Markets, observed “Any tiny risk that OPEC actually might do something during the next 6 months is completely off the table after Friday’s meeting. With this risk out of the picture, the oil price declines further.”

Impact of OPEC’s decision

With OPEC doing away with the strategy of limiting output to control prices, global glut will be on the rise unless of course there is sufficient demand to absorb the excess. Ever since OPEC led by Saudi Arabia decided to defend its market share against higher-cost U.S. shale producers by pumping more, prices have tumbled. Oil has slumped more than 40% since November 2014. The International Energy Agency mentioned global stockpiles have expanded to almost 3 billion barrels with the major producers such as Iraq and Saudi Arabia increasing supply. The resulting oil price slump has reduced OPEC revenue by nearly $500 billion a year.

Post OPEC’s decision on Friday, WTI crude declined 2.7 per cent while Brent futures lost 1.9 per cent. Oil futures further plunged yesterday, recording lowest settlements in 7 years. Yesterday also witnessed record fall in gasoline and diesel. Gasoline futures fell 4.8 per cent to $1.2094 a gallon, touching the lowest level since February 2009. Diesel futures fell 4.7 per cent to $1.2796 a gallon, again their lowest since March 2009. OPEC’s decision led to broad selloff in energy yesterday.

Stronger dollar and warm weather forecasts hurt oil prices as well

Apart from OPEC’s decision, there were two other factors that weighed on oil yesterday. A stronger dollar and warm weather forecasts impacted oil prices. Weather outlooks released yesterday showed warmer-than-average temperatures across much of the U.S. in the coming weeks. Mild temperatures have reduced expectations for consumption thereby hitting oil prices.

How have low oil prices have hurt economies?

Low oil prices did benefit consumers as expenditure on gas reduced and left more disposable income with people. On the flip side drop in profits has led energy companies to lay off employees, hurting the jobless rate in economies around the world. The loss in revenue was hurting the oil exporting members whose export income was being hurt by declining prices.

Going forward…

The oversupply will continue to plague markets next year as well. OPEC’s production could rise further in 2016 once sanctions are lifted on Iran. Post the removal of sanctions Iran’s exports will rise. Morgan Stanley notes that Iranian production will increase by 400,000 barrels a day by March and by another 200,000 barrels a day by June.

Demand growth can be expected to be robust in 2016. The supply side glut will however continue as producers continue pumping at record level to maintain market share.

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