Oil falls as Asia economies slow, prospect of crude output cut dims

WTI March 2016 futures were down over six percent, falling from a close of $33.62 per barrel to less than $32 per barrel by 17:30 GMT.

The underlying problem, as exemplified by Iran and shale, is that competition has intensified on the supply side – which is precisely why Saudi Arabia has been maximizing production in the first place. Sunday’s Arabiya report implied the proposal was not new. The March contract expired Friday after advancing 85 cents to US$34.74.

The crude oil market also has to try to get a handle on supply and demand.

Russian Energy Minister Alexander Novak and Venezuelan Oil Minister Eulogio Del Pino discussed the possibility of holding joint consultations between OPEC and non-OPEC countries in the near future, the Russian Energy Ministry said on Monday.

BMI Research has cut its oil price outlook for Brent to a 2016 average of $40 per barrel from $42.5 previously, citing the oversupply.

“Crude oil has started the new week on the back foot, giving back a big chunk of the sharp gains made in the previous couple of weeks”, said Fawad Razaqzada, analyst at City Index. “But OPEC delegates told Bloomberg there were no plans to meet”.

Oil has tumbled as the Organization of Petroleum Exporting Countries, led by Saudi Arabia, keeps the taps open to defend market share and make it harder for higher-cost producers to compete. Brent crude for April settlement was down 76 cents at $35.23 a barrel at 8:31 a.m.in London.

By historical standards, crude oil prices should remain low at least through this year. The South American nation belongs to OPEC’s Fragile Five members, which also includes Algeria, Iraq, Libya, and Nigeria. “This view is anchored by our belief that such a cut would be self-defeating given the short-cycle of shale production and the only nascent non-OPEC supply response to OPEC’s November 2014 decision to maximize long-term revenues”, Goldman said.

“Saudi Arabia’s calculations about producers of expensive oil not being able to sustain low prices and consequently starting to reduce production have been proven wrong”.

Meanwhile, any increase in oil prices resulting from cuts would throw a lifeline to a USA oil industry that has held up better than virtually anyone expected in terms of output but now faces a reckoning as more cash has to be diverted to shoring up balance sheets rather than drilling more wells. Goldman Sachs said it would be “highly unlikely” that Opec producers and Russian Federation would cooperate to cut oil output.

Even though cheap oil is supposed to be an overall positive for the US, investors have focused on the downsides, including shrinking energy profits, oil bankruptcies and trouble in emerging markets like Brazil.