UPDATE ON OPEC FROM WSJ: GOOD NEWS ON PRICES VIENNA—OPEC members rejected calls for drastic action to cut their oil output, keeping their production ceiling unchanged and suggesting the cartel is bracing for lower prices longer term. The decision on Thursday sent crude prices into a tailspin and spilled into currency and European stock markets. If Thursday’s market rout proves lasting, it will provide more relief to consumers in gasoline-guzzling countries like the U.S. But it is hammering the finances of big oil producers, from Russia to Venezuela, and biting into profit at oil companies big and small. The 12-member Organization of Petroleum Exporting Countries, who collectively pump more than one-third of the world’s oil, agreed at their meeting in Vienna to stick to the group’s current target of producing 30 million barrels a day. The absence of stronger OPEC action makes a rebound in oil prices less probable, putting more strain on oil-producing countries which became used to oil prices above $100 a barrel for much of the time since early 2011. Among OPEC’s members, only Qatar and Kuwait will be able to balance their budgets next year with prices at their current level. OPEC Meeting: What’s at Stake? The biggest losers from the current price trend could include Russia, which is already suffering from an economic slowdown and feeling the effects of both lower oil revenues and Western sanctions imposed because of the Ukraine conflict. But the drop in prices has helped consumers in developed countries such as the U.S. heading into the holiday shopping season. Lower prices at the pump and on heating bills give consumers more money for discretionary items such as restaurant meals, electronics and haircuts. The decline in gas prices over the last six months is equivalent to a $75 billion tax cut in the U.S., said economists at Goldman Sachs in research published Wednesday. Falling fuel prices also reduce production and shipping costs for an array of U.S. manufacturers, farmers and businesses. “The benefit to the economy is quite significant,” said Joseph Carson, economist at Alliance Bernstein. That windfall also accrues over time.“It’s accumulating every one or two weeks that you go to the pump.” he said. The national average for regular gasoline fell to a four-year low of nearly $2.80 a gallon on Thursday, according to auto club AAA. Gas prices were as high as $3.68 at the end of June. Cheaper oil is a rare piece of good news too for Europe’s biggest economic bloc, the euro currency area, since the region is a big oil importer. Lower oil prices, though slightly offset by the euro’s weakening against the dollar, should boost the spending power of Europe’s consumers, still suffering from high unemployment amid the eurozone’s long slump. Dwindling oil prices could complicate life for the European Central Bank, however, because they could drag inflation even further below the ECB’s target of just under 2%. The ECB is already struggling to lift inflation expectations, which could fall further along with oil and other energy prices. Many of Asia’s emerging economies are also oil importers and thus stand to benefit. Falling oil prices are “a real boon for some countries in Asia, including India, which has a fragile current-account situation,” says Eric Chaney, global chief economist at AXA Group in Paris. OPEC’s relative inaction, meanwhile, leaves the oil industry, particularly U.S. producers, “in this waiting game, like a game of chicken,” said Nasdaq energy analyst Tamar Essner. While some, including ConocoPhillips Co., have already announced plans to spend less in 2015, many more won’t unveil next year’s budget for several more weeks. In Canada, industry officials said the slide in prices wouldn’t likely lead to immediate production costs. Suncor Energy Inc., Canada’s largest oil sands producer, still expects crude to recover to “the $90 to $100 range,” chief executive Steve Williams said. But others there were less sanguine. “Clearly there is a risk of deferral of investment decisions in an environment where prices remain low,” said Jim Prentice, the premier of oil-rich Alberta province. “In a persistent low-price environment there will be consequences for all of us.” It remains unclear how OPEC will now enforce its own production limit. OPEC has exceeded its 30 million barrels a day target most quarters since it was announced in December 2011 through 2013. Its production this year through October averaged 30.1 million barrels a day, based on data from the International Energy Agency. OPEC’s production target rollover is a compromise solution designed to meet the conflicting pressures on its members. Though OPEC has been through periods of intense infighting, longtime observers say the group has rarely been as divided as during the weeks running up to Thursday’s meeting.
Posted on: Fri, 28 Nov 2014 14:10:15 +0000
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