Oil Prices Could Drop To $60 If Opec Doesn't Cut Output
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Oil prices could plunge to $60 a barrel if Opec does not agree a significant output cut when it meets in Vienna this week, market players say.
Brent crude futures have fallen 34 per cent since June to touch a four-year low of $76.76 a barrel on Nov. 14, and could tumble further if Opec does not agree to cut at least 1 million barrels per day (bpd), commodity fund managers say.
"The market would question the credibility of Opec and its influence on global oil markets if there was no cut," said Daniel Bathe, of Lupus alpha Commodity Invest Fund.
That could send Brent down to around $60, Bathe said.
"Herding behaviour and a shift to net negative speculative positions should accelerate the price plunge," he added.
Fund managers are divided over whether Opec will reach an agreement on cutting output. Bathe put the likelihood at no more than 50 per cent.
The oil price has been falling since the summer due to abundant supply -- partly from US shale oil -- and low demand growth, particularly in Europe and Asia.
As a result, some investors believe a small cut -- of around 500,000 bpd -- would not be enough to calm the markets.
Doug King, chief investment officer of RCMA Capital, sees Brent falling to $70, even with a cut of 1 million bpd.
If Opec fails to agree a cut, prices will drop "further and quite quickly", with US crude possibly sliding to $60, he said. US crude closed at $76.51 on Friday, with Brent just above $80.
Dependent on Non-Members
With member states struggling to balance budgets, many Opec countries will be pushing for an output cut.
"Prices below $80 are putting significant strain on the cartel's weakest members such as Venezuela," said Nicolas Robin, a commodities fund manager at Threadneedle.
He said a bigger cut -- of 1 million bpd or more -- was an "outlier scenario", but such a move would rapidly push prices above $85.
"A move higher would likely be accelerated by the lack of liquidity owing to the US (Thanksgiving) holiday next week," Robin added.
Doug Hepworth of Gresham Investment Management said: "A surprise significant cut, say of 2 million bpd, is needed to push prices back up to $80. And that would have to be accompanied by some new-found discipline in the non-Saudi members."
Former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah said the 12-member group is dependent on non-members to strengthen the market.
"This time, Russia, Norway and Mexico must all come to the table. Opec can make a cut, but what will happen is that non-Opec supply will continue to grow. Then what will the market do?" he was quoted as saying in a report.
The market has been awash with conspiracy theories as to why Saudi Arabia has not already intervened.
Tom Nelson, of Investec Global Energy Fund, said Saudi Arabia had allowed the price to fall to incentivise the smaller Opec producers, which often rely on the biggest producer to intervene, to join Riyadh in cutting output.
"They (the Saudis) want to cut but they don't want to cut alone," Nelson said, adding that a cut of between 1 million and 1.5 million bpd should be sufficient to balance the market.
"The market really wants to see that Opec is still functioning ... if there is a small cut, with an accompanying statement of coherence from Opec that presents a united front, and talks about seeing demand recovery, and some moderation of supply growth, then Brent could move up to $80-$90."