Oil glut to push price under $US70 per barrel, analysts warn

Tim Webb
The Times
June 25, 2012

OIL PRICES could slump as low as $US70 a barrel in the coming months as analysts warned of an impending “oil glut”.

Prices for Brent crude, the European benchmark, have already fallen from $US120 to under $US90 a barrel in less than two months as the eurozone crisis deepens and concern about the global economy mounts. The collapse will offer some much needed respite to motorists and energy bill-payers.

At the same time as the world’s developed countries are consuming less oil and consumption growth rates of developing countries such as China start to slow, supply is plentiful.

Production from Opec, the cartel of oil producers responsible for about one third of global output, is at a four-year high as Libya’s production recovers after its civil war and Iraq increases its output.

Leo Drollas from the Centre for Global Energy Studies, which was founded by Sheikh Yamani, the former Saudi oil minister, predicted that “prices have further to fall” and could go as low as $US70. He pointed to bursting oil inventories around the world as a sign of an “oil glut”.

HAVING dropped 25pc since early May, Brent crude oil now trades around $90 per barrel, a level last seen in Q4 of 2010.
Opec, whose de facto leader is the world’s biggest producer Saudi Arabia, is expected to start turning off taps to stop prices falling too far. “The Saudis hold the key,” Mr Drollas added.

Analysts from Deutsche Bank and Morgan Stanley expect prices to fall to between $US80 and $US85 when Opec starts curbing output more heavily. The consensus is that the world is unlikely to witness a repeat of the slump in 2008 when more than $US100 was knocked off the price of a barrel in less than six months.

Opec members have boosted spending on social projects to avert uprisings, which means the organising is likely to take action to bolster prices, though it could take at least six months for production cuts to take effect.

On Friday, West Texas Intermediate light sweet crude closed $US1.56 higher at $US79.76 a barrel for August delivery on the New York Mercantile Exchange. US futures still were down 5.4 per cent for the week and off nearly 25 per cent since May 1. US crude dropped below $US79 dollars a barrel last Thursday for the first time since last October.

Brent crude settled $US1.75, or 2 per cent higher, at $US90.98 a barrel for August delivery on the Intercontinental Exchange. Last Thursday, Brent futures fell below $90 a barrel for the first time since December 2010.