Oil price drops below $100 a barrel as GCC producers are close to curbing supply

The UAE, Saudi Arabia and Kuwait, as swing producers, may need to slow their production in the coming weeks to stabilise oil's price if it continues to drop.

Oil prices on Monday dipped below the US$100-a-barrel mark, threatening to pinch oil-dependent states’ budgets and getting closer to the level where Arabian Gulf swing producers feel pressured to curb supply.

The European benchmark Brent fell below the psychological barrier for the first time in 14 months.

Already last Friday, the Opec crude oil basket price was at US$98.36 a barrel. While prices are still comfortably above the break-even point for the budgets of most Gulf countries, the majority of Opec’s 12 members require higher oil prices to meet their budget obligations. That includes countries that have the additional strain of internal conflict or external pressures, such as Iraq, Nigeria and Iran.

Opec delegates blamed the drop in prices on oversupply, but expected prices to rise soon.

“But the geopolitics is there and cold weather is approaching, which will support prices,” Reuters quoted an Opec delegate as saying.

Oil prices have now fallen by more than 15 per cent from their summer peak in June, when conflict in Syria, Iraq and Libya worried the world market that supply might be threatened. But since then, the lack of any serious disruption and weaker than expected consumption in Europe and Asia have caused oil prices to drift lower.

The question now is the level at which the Gulf swing producers – Saudi Arabia, the UAE and Kuwait – will act to curb supply in an effort to stabilise prices in anticipation of action to spur economic growth in the major consuming countries.

“If oil has fallen below $100 it probably means it is a level that the Saudis are comfortable with,” said Peter Helles, a London-based commodity strategist at Bank of America Merrill Lynch.

But if prices were to get below $90 a barrel, the market would expect action because “$80 is a pretty hot floor” for the swing producers, owing to national budget considerations.

As BoA Merrill Lynch pointed out in a report last month, the old Opec quota system was essentially abandoned in 2011, so that now “in effect, key swing producers were handed a 5 [million barrels per day] band to help balance the 93 million bpd global oil market”.

The swing producers have not changed their method of signalling to the market, however, so it depends on reports of third parties – such as the International Energy Agency, or various specialised news publications – to make best guesses as to when the swing producers have curbed production. If oil prices continue their descent, this will likely be the case in the coming weeks.

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