Asia may put GCC on slippery slope

Financial Fallout: An economic slowdown threatens fuel demand, but Opec is likely to act if oil prices far too fall.
Prices may fall on lower demand growth forecasts.
Prices may fall on lower demand growth forecasts.

A slowdown in the Asian industrial boom could pull the rug from under oil prices.

Producers and consumers alike have lowered their forecasts for oil demand growth not only in western economies but also in the East. That threatens to send crude prices below the US$100 mark - the price floor for most of this year - analysts warn.

"While Asian demand will be significantly stronger than in other parts of the world, we do not believe this will be sufficient to avoid declines," says Ross Strachan, the commodities economist at Capital Economics in London.

There is bleaker demand outlook for next year, according to recent reports by Opec and the International Energy Association, the organisation based in Paris that represents 28 major consuming nations.

Some fear oil prices could to sink as far as during the 2008 downturn, when Brent, the European benchmark, dipped to $36 a barrel from a high of $147.

"The prices could very easily go into free fall," says Jason Schenker, the president of Prestige Economics in Texas. "A lot of oil producers are going to feel a lot of pain."

In 2008 declines prompted Opec to pull back 4.2 million barrels of oil from the market in three production ceiling cuts, altogether decreasing its output by 12 per cent.

At the time the organisation's 12 members, including Saudi Arabia and the UAE, were driven by the threat of falling oil revenues.

The organisation would act again if the price of Brent falls to $80 a barrel from current levels of about $105, Barclays Capital predicts.

The UAE needs the oil price to stay above $84 a barrel to break even on its annual budget, according to the Institute of International Finance.

But it remains to be seen whether Opec can coordinate any action following the acrimony at this year's meeting in June, when members failed to come to a consensus on where to set the supply ceiling.

The wild card is if the US opts for another around of quantitative easing, in which the Federal Reserve buys large amounts of debt.

That would send oil prices up, and a high price has the potential to wipe demand from the market, said Ehsan Ul Haq, the senior market analyst at KBC Energy Economics.

"If they decide to release more money into the market it will result in higher commodity prices. Prices of around $120 per barrel result in demand destruction," he says.

Published: August 14, 2011 04:00 AM


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