Representatives of the Organization of Petroleum Exporting Countries (OPEC), responsible for one third of the oil produced globally, met on November 27 in Vienna, where they decided to keep oil production to 30 million barrels per day. The decision almost immediately impacted the oil benchmark for Europe (Brent); price reached close to 70.15 dollars per barrel, the lowest since September 2010.
The price of Brent oil fell this year by 40%, its largest annual decline after 2008. The price of Brent crude, to be delivered in January, fell by 2.62 dollars at 67.53 dollars per barrel, the lowest level since October 2009, returning later to 69.34 dollars per barrel.
According to a document from Societe Generale, representatives of Saudi Arabia suggested the day before the summit that the market will regulate itself, an indication that the announced OPEC decision would be contrary to a reduction of production. The signal raised concerns in Kuwait, UAE and Angola about a market surplus. Venezuela, whose currency reserves are the lowest levels in the last 11 years, insisted in vain to reduce the production ceiling.
The price of WTI oil, reference for the US market, fell by almost 30% this year. On the day of the summit, futures contracts for WTI fell by 2.16% to 71.53 dollars per barrel. WTI price volatility neared 65 dollars a barrel. US price benchmark for oil to be delivered in January fell at a minimum of 63.72 dollars per barrel, after returning to over 66 dollars per barrel.
OPEC production in October exceeded the ceiling set by the organization for the fifth consecutive month, according to Bloomberg. Member states have produced last month 30, 97 million barrels of oil per day. According to an OPEC report published in November, global demand for OPEC oil will reach next year 29.2 million barrels per day.
On Asian commodities exchanges, the price of oil has decelerated its reduction, says Bursa daily. A barrel of WTI crude oil to be delivered in January lost around 60-70 cents, to 68.34 dollars a barrel, while Brent oil price dropped by more than 60 cents to 71.93 dollars per barrel.
Price decrease stimulate the economies of southern Europe
The drop in oil prices will boost the world economy, but producing countries may face risks, said IMF Managing Director, Christine Lagarde, writes Agerpres. A 30% decline of oil prices results in an increase of 0.8% of economic advance of the most important economies, probably 0.6% for the US, said Lagarde. Overall, the decline “is a net gain”, said the head of the IMF. The Fund may be required to support smaller states dependent on oil exports, Christine Lagarde also said.
The drop in oil prices gives an unexpected aid to so-called peripheral countries of southern Europe, the lower cost of fuel contributing to the growth of domestic demand, according to Bloomberg. An oil price between 80-90 dollars per barrel could help by 1 percentage point to the economic growth of Spain, the fourth largest in Europe, according to the government in Madrid.
In Italy, which is in its fourth year in recession, a decline of 10 dollars of oil quotation can contribute with 0.3 percentage points to GDP, BNP Paribas estimates. “There is no doubt that lower prices of oil will act as a stimulus to growth in the region” said Frederik Ducrozet, an economist at Credit Agricole in Paris. He pointed out that the beneficiaries will be clearly Greece, Spain, Portugal and Italy.
States in southern Europe, marked by record debt and unemployment, can now take advantage of the lower cost of energy and increasing purchasing power of the population. Reducing global demand, coupled with the highest oil production in the US in the last 30 years, have caused the collapse with more than 40% of the Brent oil price, from a peak of 115 dollars a barrel reached in June.
President of the Bundesbank, Germany’s central bank, Jens Weidmann, called the decline in oil prices as a “mini stimulus package.” Economies of southern Europe are also helped by the decrease of euro. This year, the euro has depreciated by 9.5% against the dollar. The European currency fell Wednesday at the lowest level since August 2012 to present against the dollar, before the monthly meeting of the European Central Bank (ECB).
The US dollar has appreciated by 0.4% against the euro at 1.2323 units per euro, which is the best evolution of the dollar against the euro since August 2012. According to the government in Madrid, fall in oil prices and the decline of the euro could help Spain to overcome the economic growth target of 2% in 2015. Spanish authorities’ earlier estimates were based on an oil price of 104 dollars per barrel and a euro quotation of 1.3 dollars per unit.
In Portugal, the government budget was calculated at a higher price of oil and its decline will always have a positive effect, said Manuel Rodrigues, Secretary of State in the Ministry of Finance. In Greece, the low price of oil will lead to changes in budget calculations.
“There will be radical changes in the budgets in all countries. Low price of oil will continue next year”, said Greek Minister of Energy, Yiannis Maniatis. A negative effect of the decline in oil prices could deter investment in oil and gas. When Greece approved legislation on hydrocarbon exploration, three and a half years ago, Brent oil price was 117 dollars per barrel.
In a period of three to four quarters, 10 dollars per barrel oil quotation decline can contribute with 0.4 percentage points to the growth of the euro area, BNP Paribas estimates. There is a risk of deflation, which may have an impact on consumption, warns Marco Brancolini, an analyst at Royal Bank of Scotland Group.
