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As the price of Brent crude fell below $60 for the first time since 2009, the most powerful nations in Opec have made clear that they are willing to push prices as low as $40 a barrel in their bid to take on Russia and US shale, a high-profile Gulf oil minister said this week. OPEC continues to put pressure on U.S. shale producers and countries like Russia and Venezuela by maintaining a stance of continued supply despite oil's price drop. Suhail al-Mazrouei, energy minister for the U.A.E., said OPEC wouldn't consider a supply cut just because oil might fall from $60 to $40 per barrel and will wait at least three months before considering an emergency meeting.
“There is a lot of crude coming on next year,” Juan Osuna, IHS Energy Inc.’s senior director for North American oil said in a phone interview Dec. 12. Producers “aren’t going to be happy, they will make a greater effort to cut costs, but they have been prepared for this.”
Tumbling prices have already had a profound impact around the globe, including in Britain where three times as many UK oil and gas firms have declared insolvency this year compared with 2013.
A report published on Monday by Moore Stephens, a UK accountancy firm, said that 18 UK oil and gas businesses became insolvent this year compared with just six in 2013, The Guardian reports. Jeremy Willmont at Moore Stephens said: "The fall in the oil price has translated into insolvencies in the oil and gas services sector remarkably quickly. The oil and gas services sector has enjoyed very strong trading conditions for the last 15 years, so perhaps they have not been quite so well prepared for a sustained deterioration in trading conditions as other sectors would have been. According to Willmont, expectations that prices will remain low for some time are fuelling the insolvencies: "There was a sharp drop in the oil price during the financial crisis, but the sense that oil prices could be depressed for some time is much more widespread this time around."
The oil market is oversupplied and someone has to cut production for oil prices to rise again. OPEC isn't blinking and so far neither is Big Oil or smaller producers like Continental Resources and Whiting Petroleum. That spells trouble for at least the next few months and I wouldn't be surprised to see oil hit $40 per barrel. But at that price, a lot of producers will be losing money and they'll have to cut production. The industry will come back eventually, but no one knows when. OPEC may be ready to endure a year of pain to kill some of the marginal players in energy. As oil prices drop to more than four-year lows, analysts are slashing their forecasts, with some predicting it could plunge as much as 40 percent to around $40 a barrel. "There is a possibility that if this price war becomes unmanageable, [we could] see prices down to about $40 a barrel [for WTI]," Jonathan Barratt, chief investment officer of Ayers Alliance Securities, told CNBC. But for oil to get all the way down to $40 a barrel would take "a massive lack of confidence in the economies, also a lack of pricing power," Barratt said.
“The market is oversupplied,” Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo said by phone. “Prices are falling and no one knows where the price floor is, however, we see some signs that investment in oil rigs in the U.S. is slowing.” When oil prices fall, there is no iron law that enhances global economic growth. The main effect is a huge redistribution from oil producers, who receive less for the effort of extracting the black gold, to consumers who benefit from cheaper transportation and energy, enabling them to spend more money on other goods and services or to save their windfall.
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