'ir­ra­tional' oil price as mar­ket tanks un­der $27

The Pak Banker - - MARKETS/SPORTS -

zone stim­u­lus hopes and a weaker-thanex­pected in­crease in US oil in­ven­to­ries.

Saudi Ara­bia is the big­gest pro­ducer within the 12-na­tion Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries (OPEC).

"The price it­self is ir­ra­tional," said Khalid al-Falih, chair­man of state-owned oil firm Saudi Aramco, at the World Eco­nomic Fo­rum in the Swiss ski re­sort of Davos on Thurs­day. "I do feel that the mar­ket has over­shot on the low side and that it is in­evitable (that it will) start turn­ing up. "Where will we be by year-end? I don't know but cer­tainly I would bet that it is go­ing to be higher than where we are to­day." The world re­mains awash with oil sup­plies, a sit­u­a­tion that has been fu­elled by OPEC's re­fusal to curb crude out­put in or­der to squeeze out high-cost US shale pro­duc­ers.

The Saudi-backed strat­egy is also aimed at pres­sur­ing non-OPEC mem­ber Rus­sia -- the big­gest global oil pro­ducer - - and force fel­low OPEC mem­ber Iran to trim out­put.

OPEC left its col­lec­tive pro­duc­tion ceil­ing un­changed, in both June and De­cem­ber 2015, at 30 mil­lion bar­rels per day. Es­ti­mated ac­tual out­put stands at 32 mil­lion bpd.

So far this year, prices faced a rapid de­scent as con­cerns also snow­balled over the strong dol­lar and weak de­mand in the fal­ter­ing world econ­omy -- par­tic­u­larly in Asian pow­er­house China.

In a gloomy omen this week, the world's stock mar­kets went into melt­down -- with many en­ter­ing bear ter­ri­tory of 20 per­cent below re­cent peaks -- as in­vestors took flight on global eco­nomic woes and col­laps­ing oil prices.

"Mar­ket sen­ti­ment con­tin­ues to re­flect con­cerns about sup­ply and de­mand," said Ac­cen­ture re­search spe­cial­ist Damien Cox.

"The story re­mains dom­i­nated by the over­sup­ply as OPEC pro­duc­tion con­tin­ues apace and US shale out­put proves seem­ingly re­mark­ably re­silient.

"Fresh con­cerns over a slow­ing global econ­omy have added im­pe­tus to the down­side in re­cent days. The slide in eq­ui­ties maybe re­flects a more pes­simistic macroe­co­nomic out­look which in turn hints at lower en­ergy de­mand." Rus­sia was among the hard­est hit this week, with its ru­ble cur­rency slump­ing to a record low against the dol­lar. The na­tion's en­ergy-re­liant econ­omy has al­ready been pushed into re­ces­sion by low oil prices and Western sanc­tions over Ukraine.

"The de­ci­sion made by OPEC's main player, Saudi Ara­bia, not to cut sup­ply in or­der to pro­tect its mar­ket share, trig­gered a price war," noted Dr Nikos Pal­ta­l­idis, fi­nance lec­turer at Durham Univer­sity Busi­ness School.

"By push­ing prices to such low lev­els, high-cost coun­tries, such as Rus­sia, Iran and shale-oil pro­duc­ers in the United States, will face se­vere pres­sure to close down un­prof­itable in­vest­ments."

He added: "The main tar­get from this pol­icy is to force Rus­sia and Iran to curb the pro­duc­tion of oil.

"OPEC's share of the world oil mar­ket is only 30 per­cent, down from al­most 60 per­cent 20 years ago, and they want to in­crease their share in the global oil mar­ket." Saudi Ara­bia and other rich Gulf state OPEC mem­bers can cope with a pe­riod of low oil prices.

How­ever, poorer OPEC na­tions like Nige­ria and Venezuela want lower out­put in or­der to lift prices and boost their pre­cious rev­enues -- and have both re­port­edly called for an emer­gency meet­ing.

"We have the most re­silient ca­pac­ity ... to take what­ever the mar­ket serves us," added Saudi Aramco chief Falih in Davos. "If price con­tinue to be low, we will be able to with­stand it for a long, long time. "Ob­vi­ously we don't hope for that -- but we have pre­pared for it. We have the low­est cost pro­duc­tion in the planet."

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