LONDON: The oil market faces an uncertain outlook in 2015 as tumbling prices resulting from global oversupply stoke geopolitical tensions in key producers of crude, analysts say.
Oil prices have lost around half their value since June, punished by abundant supplies, a stronger dollar and weak demand in the faltering world economy.
Losses accelerated in late November when the Organization of Petroleum Exporting Countries (OPEC) – which pumps out one-third of the world’s oil – decided against cutting its output despite the supply glut.
Prices subsequently hit a series of five-year lows in London and New York, rocked also by 2015 oil demand forecast downgrades from both OPEC and the International Energy Agency watchdog.
At the OPEC meeting on Nov 27, kingpin Saudi Arabia and other Gulf monarchies opposed a cut to the cartel’s daily output ceiling of 30 million barrels.
Analysts say they want lower prices, even if it slashes incomes, to counter the rise of US shale oil – which is more expensive to produce and eats into OPEC’s market share.
However at the other end of the scale, oil producers Venezuela, Nigeria, Iran, Iraq and Russia are desperate for prices to rise so they can balance their books and salvage their teetering economies.
In Venezuela, plunging crude oil prices have already sparked social unrest and political uncertainty.
Following the OPEC meeting, Venezuelan President Nicolas Maduro ordered his government to slash the budget of his oil-dependent and economically weak nation.
In Russia, the tumbling oil market – combined with Western sanctions linked to the Ukraine crisis – has sparked a collapse in the ruble.
The plunge in crude prices since June has hit Russia particularly hard, as half of the country’s revenues stem from energy exports.
Russia’s central bank hiked its interest rate for the second time in a week on Monday in an attempt to halt the ruble’s plunge, which has sparked huge rises for consumer goods.
Norway, on the other hand, unexpectedly cut interest rates on Thursday in an effort to counteract the impact of plunging oil prices and stimulate the Nordic nation’s oil-dependent economy.
In the Middle East, Iraq – which is battling Islamic State (IS) militants – will take a major hit from the plunging cost of crude, according to expert Richard Mallinson at consultancy Energy Aspects.
“For now the Iraqi prime minister (Haider al-Abadi) is managing to hold together his political coalition and has halted IS advances with various international support,” Mallinson said.
“Iraqi politicians will find it difficult to cut spending in the current context and so the country is potentially facing a serious economic crisis in the next year or two.”
Added to the picture, Iran – the second biggest oil producer in the 12-nation OPEC cartel after kingpin Saudi Arabia – is gaining increasing power within Iraq.
“Iran is getting even more influential in Iraq, and those two countries together could start to challenge the level of Saudi crude oil exports in coming years,” said Petromatrix analyst Olivier Jakob.
At the same time however, US lawmakers could decide next year to impose fresh sanctions on Iran over its disputed nuclear energy programme, which could continue to weigh on the nation’s own oil exports.
Some analysts, however, predict that low oil prices could stimulate demand and global economic growth, which would help soak up excess supplies.
In turn, that would help to lift prices in the long run.
“One cure for low oil prices is low oil prices,” summarised analysts at Swiss bank UBS.
A 25 per cent drop in world oil prices in the short term would help boost global demand for crude by 0.50 per cent, or 460,000 barrels per day, according to IMF data cited by British bank Barclays.
However, it could take quite some time for the benefits of low oil prices to boost world economic growth.
“It could potentially take from a few months to perhaps a year for the lower oil prices to feed through the global economy,” noted analyst Fawad Razaqzada at trading site Forex.com.
In the meantime, low prices would curb output from high-cost US shale energy producers, according to Germany’s Commerzbank.
Falling oil prices “will be a tough test for the profitability of many (US) producers and is likely to spark a supply reaction in the medium term,” said Commerzbank analyst Carsten Fritsch.
OPEC faces tough new competition from cheaper oil from US shale fields – but this involves a costly extraction process that needs high oil prices to make it worthwhile.
Oil output is booming in the United States thanks to fracking, which involves blasting a high-pressure blend of water, sand and chemicals deep underground in order to release hydrocarbons trapped between layers of shale rock. --AFP