Why oil prices are falling

Alicia Cross
November 13, 2018

A big concern for Saudi Arabia and other traditional producers from the Middle East-dominated Organisation of the Petroleum Exporting Countries (OPEC) is the surge in USA output.

Oil prices have fallen roughly 20% in the last month, driven lower by a rapid increase in global supply and the threat of a slowdown in demand - especially from countries such as India, Indonesia and China, whose currencies have weakened against the dollar and eroded their purchasing power.

Saudi Arabia's energy minister called Monday for a global output cut of one million barrels per day to re-balance the market, as Riyadh unveiled plans to cut production by 500,000 bpd from December.

The minister also indicated OPEC members are willing to cut down production by one million barrels a day to "balance the market".

Looking ahead, Commodity Analysts at RBC Capital Markets believe the likelihood of an official production cut from OPEC and its key allies at its December meeting is now increasing.

"The US had contributed to volumes and there was an "inventory build-up" which needed adjustment", Mr Falih said.

Oil has been tumbling on heavy supply levels recently and so this announcement over the weekend that Saudi Arabia will limit supply by cutting 500K barrels per day from December has resulted in U.S. crude being bid. The kingdom will reduce shipments by about half that amount next month, he said.

The rig count is an indicator that U.S. crude production, already at a record 11.6 million barrels per day (bpd), will increase further.

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Although there are signs of a glut emerging in the USA, the Saudi minister said Sunday it was too early to talk about coordinated production cuts within OPEC+.

Kuwait, Iraq, Russia and the United Arab Emirates also boosted their output. That confounded a market that was anticipating a stricter enforcement. "The committee reviewed current oil supply and demand fundamentals and noted that 2019 prospects point to higher supply growth than global requirements", it said in a statement.

The cut represents a reduction in global oil supply of about 0.5 per cent. Saudi Arabia is the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC).

That would largely wipe out the 1m bpd increase the group agreed in June in a bid to rein in the price of oil.

Worldwide benchmark Brent crude oil futures were at $69.17 per barrel, down 95 cents, or 1.4 percent, from their last close. "The language from Russian Federation suggests it is not ready to follow the Saudis yet".

He said market sentiment had shifted from fears of shortages to worries about oversupply. "They seem to be sitting squarely on the fence about pulling the barrels back".

USA production has more than doubled over the last decade and surpassed 11 million barrels per day this summer.

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