NEWS

Oil falls on news that Saudis are preparing for $60 US crude

12/04/2014 01:13 EST | Updated 02/03/2015 05:59 EST
News that Saudi Arabia expects oil prices to stabilize around $60 US a barrel pushed oil futures lower today.

Brent Crude, the contract traded in most of the world is down 35 cents to $69.57, well below the $70 that some had considered a threshold. Brent has fallen 37 per cent this year.

WTI, the North American contract, fell 80 cents to $66.58 US and Western Canada Select, the price offered for Canadian crude, is now at $50.33. The discount offered for WCS has widened in part because of difficulties getting oil to market.

Dow Jones, quoting unnamed sources, reported Wednesday that Saudi officials believed $60 a barrel was a price they could live with.

The Gulf states “don’t have a price target,” the source said, but “if prices drop further below $60, it won’t be for a long time.”

Oversupply of oil

Saudi Arabia is preparing to slash its January prices in the United States and Asia.

The price of oil is dropping because the U.S. has ramped up production of shale oil and world demand for oil is waning as emerging economies begin to cool and Europe’s fuel use flattens.

When Saudi Arabia, the de facto leader of OPEC, trimmed its prices to $71 last month, markets believed $70 a barrel might be the base price for oil.

But at a meeting last week, OPEC decided not to pull back on production and oil prices began falling again. Brent Crude has fallen 10 per cent in the past week.

Venezuela, which is reliant on oil revenues, had urged a deep cut in oil output at the OPEC meeting, but Russia, which is not part of the oil cartel, indicated it would not participate in a general supply cut.

When OPEC cuts back on supply, it’s usually the Saudis that have to make the sacrifice.

The Saudis “have seen their market share be continually diminished, especially in the U.S., and I think they’ve grown weary of it,” says Kyle Cooper, managing partner of research consultancy IAF Advisors in Houston

Instead, they may be hoping that unconventional oil producers such as U.S. shale and Canadian oilsands producers who have higher production costs may be forced to pull back because of lower prices.

The Canadian economy, which is heavily reliant on oil, stands to be affected by the lower prices.

However, Prime Minister Stephen Harper said he doesn't expect federal finances to be greatly impacted by lower prices.

"It’s difficult to predict ... the effects on the economy and the federal fiscal balance. You have to remember that the federal government, unlike the Province of Alberta, does not receive direct royalty payments from the oil and gas industry," Harper said at a public appearance in Markham, Ont.

"This has a complex effect on the economy, a complex effect upon ultimately federal finances, but for greater assurance in the fall fiscal update, the minister of finance made considerable allowance for fiscal uncertainty generated by the falling oil prices so we remain very confident that the budget will be in balance next year," he continued.  

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