Financial Fallout: Opec lowered its forecast for global oil demand, giving ammunition to member countries who have pushed for production drops.
Dark clouds force Opec to cut back oil forecast
Opec cut its forecast for oil demand this year, giving ammunition to member countries that have pushed to hold back supplies from the world market.
The group is split between price hawks and doves, but the recent 20 per cent drop in prices and a weaker demand outlook have already prompted some countries to express concern.
Yesterday, Opec lowered its estimate for crude oil consumption by 150,000 barrels per day (bpd) as Brent crude, the European benchmark, dipped below US$100 for the first time in eight months.
"Dark clouds over the economy are already impacting the market's direction," said the Opec report.
Earlier this year Iran resisted efforts to raise the group's output target in the face of oil prices that had hit $127 and calls from consuming nations to boost supply. Sheikh Abdullah bin Zayed, the UAE Minister of Foreign Affairs, criticised the failure to raise production.
Later yesterday, the price of Brent rebounded to $104 a barrel, but analysts say prices could drop again.
"The prices could very easily go into free fall," said Jason Schenker, the president of Prestige Economics in Austin. "You could go back down to the lows we saw in the last cycle."
In 2008, oil prices plummeted from a high of $147 a barrel to $36. That year, Opec stemmed losses by lowering its production ceiling three times, altogether cutting its output target by more 4.2 million bpd, almost 12 per cent. The ceiling sets limits for 11 members subject to quota - Iraq is the exception.
At its last meeting in June, the group failed to come to a consensus after Iran led a coalition of six countries to block Saudi Arabia's attempts to raise the group ceiling. Iran is the current holder of the group's rotating presidency.
But drops in the oil price since the US credit rating downgrade last week and the revised Opec forecast could force the group to come to a consensus, as it did during the last financial downturn.
"If the price goes below $90 a barrel, then it will be painful not only for Iran but also for countries in the Gulf," said Ehsan Ul Haq, a senior market consultant at KBC Energy Economics. "Even countries like Saudi Arabia will think about changing production."
Opec's next scheduled meeting is in December, and a delegate quoted by Reuters said no emergency meetings had been planned before then.High oil revenues have financed multibillion-dollar spending plans in Gulf states.
Last week JPMorgan said Gulf producers would be able to sustain a 1 million to 1.5 million bpd cut to production and still take in enough revenue for their annual budgets.
The UAE needs the price of Brent crude to stay above $84 to break even, according to The Institute of International Finance, based in Washington.