Brent on course to fall below $70 a barrel for first time in four years

The shale oil glut has contributed to the falling price of oil. Above, pump jacks at dawn in an oilfield over the Monterey shale formation in California. David McNew / AFP

Brent crude, the world oil benchmark, is set to crash through US$70 a barrel for the first time in more than four years, after one of the most precipitous falls in oil market history.

The decline gained momentum as it became clear in recent weeks that Opec policymakers would not – or could not – take any effective action to stem the slide. This was confirmed last week when the organisation’s oil ministers met in Vienna and decided to keep their current production target of 30 million barrels per day unchanged, even though it now seems clear that output is about 1 million bpd more than the world’s oil consumers will need.

Much of the commentary that has followed the Opec decision has been about the motives of the group’s effective leader, Saudi Arabia, and what that means for the oil market for the foreseeable future. The conclusion has been that Saudi Arabia wants a period of oil prices well below $100 a barrel that they have averaged over the past four years to force off the market some of the more expensive-to-produce oil, such as that from unconventional sources (shale and others), primarily in North America.

The influential Edinburgh-based oil consultancy Wood Mackenzie expects that a prolonged period during which Brent trades below $75 a barrel, and US benchmark West Texas Intermediate trades below $70 a barrel, would ultimately force a change in the economics – and therefore production – of US shale oil, also known as “tight oil”.

“For US tight oil, our detailed break-even price analysis shows by end-2015, such prices could lead to at least 600,000 bpd being removed from the market, which would curb the oversupply situation,” Wood Mackenzie’s chief macro oil analyst, Ann-Louise Hittle, argues. “Importantly, these prices would also send a sharp signal to the industry and have a wholesale effect on future spending plans which will feed through to oil prices as a supportive factor. “

Although North American production has been the main focus, there are other projects around the world that may be postponed or even cancelled if the big oil companies that fund them expect oil prices to stay low for a prolonged period. When asked about this in recent weeks, senior executives from the major oil companies have indicated that projects already committed to will not be affected by current oil prices, but that they will be taking into account the oil price outlook when they decide next year’s capital expenditure in the new year.

Surveying the oil market predictions after the Opec meeting, there is little doubt that most forecasters expect a long period of lower oil prices.

As Tom Pugh of Capital Economics points out, when Opec ministers next meet – scheduled for next June, although they can call an emergency meeting any time – they may well be facing other concerns. Assuming world oil demand plays out as forecast next year, the oversupply may get worse if by the next meeting Iran is able to thrash out an agreement with the US and other world powers over its nuclear programme. This would mean it would look to ramp up production by 1 million bpd as soon as it could.

But it should also be borne in mind that the oil market is littered with failed prognostications about where prices are headed, even in the short term.

When prices were last at current levels, they were poised to more than double within two years – and few had predicted that in the midst of the post-financial crisis gloom.

At the turn of this century, when oil prices were hovering around $20 a barrel, there were few predictions of the long steady rise in Chinese demand that ultimately pushed prices to a peak above $145 a barrel before the financial crisis, a time when the Goldman Sachs analyst Arjun Murji predicted a “superspike” to $200 a barrel. A faster pace for economic recovery next year and a few unforeseen production outages and that view may be back in fashion.

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