The price of oil is down across the board these last couple of days, setting record lows not seen in five years. Brent crude dropped below $60 a barrel today and the futures fell below $54 a barrel yesterday for the first time since May 2009.
Last month, before the last meeting of the Organisation of Petroleum Exporting Countries (OPEC), we wrote that, beyond market forces driving the price of oil down such as a decelerating Chinese economy and an American fracking frenzy, influential governments are also pushing the price down as a form of economic warfare. By refusing to cut oil production at its own expense at the OPEC cartel meeting, Saudi Arabia proved that this is indeed the case.
The kingdom’s geopolitical rivals and fellow energy producers, Russia and Iran, reveal that they are too weak at this point in time to cut their oil production or resist selling at ever lower prices.
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The Russian Energy Minister, Alexander Novak, says that his country’s oil production will remain steady in 2015 around 10.6 million barrels a day, at the same level it was this year. Suffering a devastating currency crisis and facing threats of more Western economic sanctions while maintaining a costly military involvement in Ukraine, it is no doubt that Russia, the world’s biggest crude producer, can’t afford to cut production at this time.
Iran is selling its light crude to Asian consumers at $1.80 a barrel, below the regional benchmark for January, Bloomberg quoted “people with knowledge of the decision.” Its official selling price for December was at a premium of 13 cents. Locked in a sectarian struggle with Saudi Arabia, Iran has to support with hard cash the Syrian government and other regional actors. It is forced to sell its oil at a discount to Asia as Western sanctions limit its access to other markets.
So how low can the price of oil go? It seems “lower” is the right answer. The speculations in the American energy market say that most US shale gas producers need the price of oil to be at $60 or over to be competitive, but many have hedged their risks when prices were higher and can keep producing even when it is no longer that high for almost a year. If that is true, the Saudis will have to sustain sub-$60 prices for a while to scare American banks and investors away from financing any more shale exploration. With a reported $2 price of sweet crude production, that will not be a problem for the oil rich kingdom.
The next OPEC meeting is scheduled for June 5th, 2015.