Robin Pagnamenta, 08 December 2015

Global oil prices could fall as low as $US20 per barrel next year, as OPEC’s decision to abandon a formal production quota exacerbates a bulging supply glut.

Speaking as the price of a barrel of Brent crude, the benchmark international contract, slipped 5.2 per cent to $US40.75 in New York, the lowest since February 2009, Ole Hansen, head of commodity strategy at Saxo Bank, said it was “difficult to rule out anything”.

“We could see a short-lived phase of all-out panic, which could trigger a free fall situation,” he said. “With no signs of non-OPEC producers, such as US and Russia, cutting back, the near-term outlook for oil remains very challenging indeed.”

A meeting of the OPEC cartel in Vienna broke up on Friday with no agreement between members on output levels.

The price of crude has already plunged nearly by 64 per cent since June 2014, when a barrel of Brent cost $US114, after Saudi Arabia opted to pump at near-record levels to maintain market share while putting pressure on producers in North America.

Mr Hansen said that downward pressure on crude oil prices would intensify in the first three months of 2015 because of increased output from Iran and a seasonal rise in US stockpiles.

Goldman Sachs also warned that OPEC’s inconclusive meeting could trigger further falls, to as low as $US20 per barrel, and said that prices were now likely to remain “lower for longer”.

There was disagreement between OPEC’s 13 members on how to accommodate the extra Iranian oil expected to flood the market when western sanctions over the country’s nuclear program are lifted, probably in the first or second quarter of next year.

Iran has refused to consider reining back its production until it reaches its pre-sanctions level of four million barrels per day. Saudi Arabia has no plans to curb its own production without co-operation from Iran, Iraq and others.

“The market is taking on board the fact that Saudi Arabia’s production strategy is long term and they are simply not going to cut,” Michael Wittner, an oil analyst at Societe Generale in New York, said.

OPEC’s present output is 31.5 million barrels per day – one third of the world’s oil and well above its previous official quota of 30 million barrels. The group acknowledged that there was little it could do to shore up the market as long as non-OPEC producers continued to pump at near-record levels.

Emmanuel Ibe Kachikwu, the president of OPEC, said that the group was in “wait and watch” mode until its next meeting, in June. Uncertainty about Iran’s production was a driver for the decision not to make changes, he said.

Oil has not traded at its present levels since the collapse of Lehman Brothers in 2008 sent financial markets into a tailspin. The latest price fall came as the European Union said yesterday that it was dropping an investigation into alleged oil price manipulation during the financial crisis by groups, including Shell and BP.

Figures to be published this week by the International Energy Agency are likely to point to a swelling global glut of oil, which already stands at about three billion barrels.

Extracted in full from The Australian.