The $80 Brent oil benchmark may be long gone for now, as oil prices collapsed on Friday, after Saudi and Russia tried to appease fears of supply shortage from Venezuela, and Iran, driving fears that the OPEC production cut deal may soon come to an end.
OPEC had agreed with a coalition of non-OPEC members to cut production by 1.8 million bpd till end 2018.
U.S. West Texas Intermediate crude prices dropped below $68 a barrel, slipping further from this week’s peak of $72.83, its highest since November 2014. The contract finished the session down $2.83, or 4 percent, at $67.88 a barrel, reported CNBC.
Meanwhile, Brent crude fell $2.42, or 3.1 percent, to $76.37. The international benchmark for oil prices last week hit a 3½-year high of $80.50, also going back to November 2014, added CNBC.
Graph Courtesy of Oilprice.com
“Saudi Arabia and Russia are in discussions about raising their production limits, perhaps adding as much as 1 million barrels per day to the market. The group could announce a change in Vienna next month,” said Oilprice.com, an industry site.
“The steep losses from Venezuela meant that OPEC’s compliance with the cuts surpassed 150% last month. The idea would be to bring compliance back down to 100 percent, which would mean allowing members to produce more to offset Venezuela’s declines.”
What to expect
Oil prices fell sharply Friday after Russian Energy Minister Alexander Novak met with his Saudi counterpart, Khalid Al-Falih, in St. Petersburg to discuss the deal, which has aimed to keep 1.8 million barrels a day off the market since January 2017.
“These influential energy ministers said a group of two dozen producer nations could soon begin easing the production limits they put in place last year to drain a global crude glut,” reported CNBC..
“The parties are now considering a gradual exit to that deal to compensate for falling production in crisis-stricken Venezuela and anticipated export disruption from Iran, which faces renewed U.S. sanctions.”
The ministers are considering a supply increase of as much as 1 million barrels a day to cool the market, sources told Reuters.
Al-Falih is particularly concerned about the impact of oil prices above $80 a barrel on consumer nations like China and India, the news agency reported.
U.S. oil exports hit a new record at 2.6 million barrels per day two weeks ago, said Oilprice.com.
Future demand and prices
Investment bank UBS says that a price spike to $100 per barrel is possible, which should be worrying because it could trigger an economic recession. “Now that we are getting closer to $100/bbl the net impact of higher oil prices is again becoming a net negative,” UBS said in a research note. “The global sweet spot — where oil prices may have positively contributed to global growth — seems to be somewhere between $50/bbl and $70/bbl.”
Meanwhile, The adoption of 240 million electric vehicles by 2040 will cause oil demand to peak by the mid-2020s, which will destroy $19 trillion in income, according to Aurora Energy Research Ltd.
“Aurora’s “analysis points to a possible energy future of mass electrification, digitization, and new technologies, in which the rise in electric vehicles and continued improvements in fuel efficiency lead to peak oil demand occurring in the mid-2020,” Richard Howard, head of research at Aurora, said in the report.
“Ultimately, the displacement of around 8 million barrels per day could cause oil prices to fall to as low as $32 per barrel by 2040,” said Oilprice.com.