Commodity Update; Crude Oil – 14 October 2014

OPEC rumours are a game changer for Oil benchmarks if confirmed at November meeting

Crude benchmarks continued to decline last week as doubts grew over whether OPEC would soon take action in order to stave off a prolonged period of price weakness.

Key to the week’s developments has been comments made by Saudi Arabian officials in private meetings. Here, Reuters reported this week that some oil ministers have indicated a willingness to accept prices below $90 per barrel for an extended period.

While there has been no official comments as to the exact reasons behind this there are a number of credible theories that have been mooted.

Perhaps the most likely of these is that Saudi officials are seeking to pressure other OPEC member states into accepting at least some share of any production cuts that do eventually go ahead, given the nation’s history as the “swing producer” that reduces output to support prices each time during periods of weakness.

Another credible theory is that OPEC nations could be seeking to mothball production of US shale oil in order to maintain market share over the longer term. On this note, much of the recent weakness in oil prices has come as a result of rapid production increases in North America, where output reached a multi decade high during the summer of this year.

While it is not yet possible to be sure of OPEC’s strategy; one thing that is near certain is that, with prices already below $90, oil benchmarks are officially in bear market territory. With this and the game changer of OPEC intentions in mind, further price declines cannot be ruled out.  

Brent / WTI Overlay / Daily Chart

Brent 14 October

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