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The oil price drop continued on Monday, thanks to the fact that Saudi Arabia announced any output cut will depend on non-OPEC cooperation.
Saudi oil minister Ali al Naimi revealed on the same day that the world’s biggest oil producer has no plans to make any cuts on its oil production as long as producers outside the OPEC show no intention to do the same. Quite the opposite, the kingdom announced an increase in its oil output, which is now wavering around a new record high of 10 million barrels per day (bpd).
The oil prices started falling a few months ago, among mounting reports that several non-OPEC countries, led by the United States, have been increasing their stockpiles. Brent crude oil futures dropped below US $55 a barrel on Monday, recording a 21 cents decrease, and actually hit a low of $54.12 a barrel during the day. U.S. WTI crude also dropped 87 cents to $45.70 in Monday’s trading.
Saudi Arabian government has reaffirmed its commitment to remain loyal to the oil production policy practiced so far, and the recently announced output increase means the oil giant is now pumping 350,000 more barrels per day than it did during last month. “We repeat that, as for prices, the market determines it,” the Saudi oil minister said on Sunday, and the next day announcement seems to confirm his position.
The Saudis seem determined to face the huge oil price decline as nothing happened, and analysts believe the country’s immense resources actually allow them to do so. They fear potential competition from non-OPEC countries like the US. The United States could indeed become a serious competitor for OPEC if the government decides to begin oil exports once the domestic reserve reaches full capacity.
China is another country that took advantage of the oil price decline since last year, and the government in Beijing started building up its own reserve. However, as in the US case, their storage tanks might be reaching their limits soon, as Chinese oil imports declined lately.
Barclays’ analysts predict that if OPEC production doesn’t slow down and the current 30 million bpd figure stands, global oil production would exceed demand by 1.3 million bpd, up from the 900,000 bpd surplus last month.
The constant strengthening of the dollar took its toll on the oil price decrease. A slight weakening of the greenback on Monday, caused by ongoing speculations of a Federal Reserve interest rate increase, prevented an even sharper decline in oil prices everywhere.
A recent Bank of America Merrill Lynch report concluded the world economy is now taking a different path to the one it has been on in the past 15 years. “The global economy was defined by rising commodity prices, zero interest rate policy, and a weak USD. This cycle has now gone into reverse with a decelerating industrial economy in China and the rise of U.S. shale,” the report stated.
Meanwhile, in the United States…
Investors in the United States are still waiting for a sign from the Federal Reserve Bank about the long-awaited rate increase. After St Louis Fed President James Bullard commented in the media that he doesn’t believe the dollar can strengthen anymore against the euro, the greenback recorded a significant decline. It was the largest fall the US currency registered over the course of a single week in more than three years.
The dollar continues to remain near the 12-year record level recorded earlier this month, and it is unlikely that its recent decline will continue for much longer if the Fed doesn’t come with a decision soon. Federal Reserve officials have recently updated their projected federal funds rate hike, suggesting it will be closer to 0.625 percent than the 1.125 percent increase proposal they came up with twelve months ago.
But so far, still no official date. Many high rank officials hinted that the federal bank intends to postpone an increase for September this year, giving the economy more time to adjust to the change. Fed Chair Janet Yellen, however, offered no guarantees.
The only proof analysts have is the removal of the word “patient” from the Federal Reserve’s approach, but their speculations were quickly countered by Yellen, who said it does not mean the Federal Reserve is becoming “impatient” about a rate increase.
In the meantime, the strong dollar keeps troubling the exports of US-based companies and it’s shrinking the oil price. European Union leaders don’t have any intention of challenging the strong dollar, as a weaker euro helps the 28-country bloc better deal with its own problems, like Greece’s debt.
The combined effects of the rising dollar and the declining oil price could lead to a significant increase in commodity prices, as companies will seek to stabilize their profits. Federal Reserve intervention could solve the problem. “A combination of a strong USD, higher interest rates and subdued growth may keep commodity prices in check in 2015,” according to the Bank of America report.
Image Source: Financial Post
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