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Oil price plunges after Opec split keeps output steady Oil price plunges after Opec split keeps output steady
(about 2 hours later)
Plunging world oil prices are threatening jobs in the UK North Sea and ramping up pressure on George Osborne to introduce more tax breaks for oil and gas operators at his autumn statement next week. Oil prices have crashed to a new four-year low, below $72 per barrel, after a major split inside Opec forced the cartel to hold production at current levels rather than make cuts to try to turn the market around.
The cost of Brent crude slumped below $76 per barrel – a four-year low – on Thursday as Opec signalled it would not be introducing production cuts on the cartel dominated by Middle East producers. The reduced cost of energy - prices are now down 37% since the summer - should be a boost to British consumers and the wider economy, but experts warned the North Sea oil industry is now facing a slump in investment and major job cuts.
“Every decrease by a dollar is a negative for the North Sea. Lower oil prices are not good for anyone in the industry and they could endanger jobs, there is no doubt about that,” said Uisdean Vass, oil and gas partner at law firm Bond Dickinson. Earlier this week an Oil and Gas Survey conducted by Aberdeen & Grampian Chamber of Commerce and sponsored by Bond Dickinson showed that for the first time since 2008 more operators and contractors were pessimistic about their North Sea activity than optimistic. There are now predictions that the price of Brent blend could fall to as low as $60, which would be disastrous for countries with high producing costs and economies dependent on oil and gas, such as Russia and Iran.
James Bream, research and policy director at Aberdeen & Grampian Chamber of Commerce, called on the chancellor to introduce tax breaks at the autumn statement on Wednesday. Norway, an important oil and gas producer outside OPEC, saw its Krona currency hit a five year low against the dollar while Shell and BP saw their shares battered.
“Companies are not convinced they can get a fair return on their investment and in a global industry, it is very simple for them to move their capital elsewhere. The government must be aware that decisions in the next few months will also have a major impact on the £35bn supply chain that exists in the UK.” Lower prices have already led to lower petrol and diesel bills for motorists and the transport sector which should feed through into manufacturing. But cheaper fuel will also lower the UK inflation rate, which at 1.3% is already well below the Bank of England’s target rate of 2%.
Oil & Gas UK, the offshore industry’s lobby group, estimates that 440,000 people are employed directly or indirectly around the UK as a result of oil and gas extraction. Prior to a crunch meeting at its Vienna headquarters, OPEC was under under huge pressure from some members to reduce output in a bid to counter the five month slide in Brent blend prices from $115. Prices have fallen due to increased US shale production and faltering demand as growth slows in China, Europe and emerging markets.
The slump in oil prices started in June on the back of increasing output from US shale operators at a time of lower demand combined with a stuttering of global economic growth. Abdalla El-Badri, the Opec secretary-general, put on a brave face to hide the split between rich nations such as Saudi Arabia, which want to hold prices, and others such as cash-strapped Venezuela which are desperate for output cuts. He insisted that there was unity between all the cartel members, even though the Venezuelan oil minister stormed out of the meeting in protest.
Daniel Ang, an investment analyst with Phillip Capital in Singapore, said that a “consensus” reached by Saudi Arabia, Kuwait, Qatar and the United Arab Emirates indicated there would be no output cuts on Thursday. “My ministers have agreed and are happy so I am happy, he said after the meeting in Vienna, where OPEC’s secretariat is based. “We are not sending a message to anyone. We are just trying to set a fair price.”
“Dreams of rising oil prices [have been] smashed with pre-Opec meeting sentiments. Brace yourselves for lower oil prices,” he told Reuters, while UAE oil minister, Suhail bin Mohammed al-Mazroui, told the FT that the market will, eventually, fix the oversupply in the oil market. “I don’t think we should panic. There is nothing that should cause us to panic.” He went on: “The (global oil) price decline does not mean we should rush to do something...We don’t want to panic. We want to see how the price reacts (to OPEC maintaining output levels).”
Kuwait said that Opec can cope, whether the oil price is $80 or as low as $60, while Saudi Arabia’s oil minister, Ali Al-Naimi, told reporters that Opec will take a “unified position”. This follows days of leaks suggesting producers would not slash output. But the decision not to cut output for at least six months was viewed by analysts as an illustration of OPEC’s weakness - that it was unable to find a unified solution to the problems posed by rival oil supplies from the US shale fields.
Venezuela’s foreign minister, Rafael Ramirez, took a swipe at America’s burgeoning shale industry as he arrived at the Opec meeting, suggesting it should be reined in: “The US is producing in a very, very bad manner. The shale oil, I mean it is a disaster from the point of view of climate change …” “The group’s credibility is definitely under the spotlight,” said Miswin Mahesh, oil analyst at Barclays Capital in London. “If it does not cut it brings up arguments about what is OPEC for. If it had cut by 500,000 barrels a day it would not have been enough and it had cut by 1m enforcing it (on its members) would be very tricky.”
Marc Ostwald of ADM Investor Services warned that another slide in the oil price would have serious consequences for countries such as Russia whose economies are heavily dependent on commodities. OPEC is already producing almost one million barrels a day more than its stated 30m target. .
Venezuela’s embattled foreign minister, Rafael Ramirez, criticised US frackers as he arrived at the Opec meeting, suggesting they should be reined in: “The US is producing in a very, very bad manner. The shale oil, I mean it is a disaster from the point of view of climate change.” Bijan Namdar Zanganeh, the Iranian oil minister, insisted after the meeting he was not angry about the decision but also made clear it was “not in line with what we wanted.”
The cartel’s first female president, Nigeria’s petroleum minister Diezani Alison-Maduek, who was elected yesterday, said it was a tough decision whether to cut output, saying it was “a toss of the coin” whether a cut would have forced up prices.
High costs and lower oil prices are already leading to hundreds of job losses in the UK North Sea, ramping up pressure on George Osborne to introduce more tax breaks for oil and gas operators in his autumn statement next week.
Mike Tholen, economics director at the Oil & Gas UK lobby group, said: “Numerous oil companies - household names in Aberdeen - are already pulling back, some of them gently and some robustly. The Treasury’s review into the North Sea fiscal regime must deliver a positive outcome both to ease the burden on existing production and to attract new investment.”
Shell, Chevron and others each announced hundreds of job cuts this summer, and Jake Moolo, Aberdeen-based organiser for the RMT, said his members faced a “bleak” future of redundancies and a lack of investment.
James Bream, a director at Aberdeen & Grampian Chamber of Commerce, warned the chancellor things were getting bleak: “Companies are not convinced they can get a fair return on their investment and in a global industry, it is very simple for them to move their capital elsewhere.”