Will the continuing fall in oil prices kickoff a global recession?

Will the continuing fall in oil prices kickoff a global recession?

Baku, Azerbaijan, Jan. 26

Trend:

Monday Morning oil market review by Vagif Sharifov

Oil prices

The average OPEC basket price last week stood at $43.30/bbl, the US WTI for the March settlement $45.59/bbl, Brent for the same month delivery $48.79 per barrel. The average price for Azeri Light oil, exported from Azerbaijan via the Turkish Ceyhan, Georgian Batumi and Supsa ports to Italian Augusta, was $49.69/bbl.

Forecasts from various experts, bank analysts, oil and consulting companies indicate that the average oil price at around 60 dollars per barrel this year. The signals from OPEC raise hopes for the oil market showing some stability in the near future. OPEC's head Abdalla El-Badri thinks the oil price will not go to $20/bbl.

"I think the price will stay at where we are now," he said in an interview with Bloomberg Television at the World Economic Forum in Davos last week. "We have seen this before - prices coming down very fast and go up very slow. But prices will rebound."

However the experts have yet to see any defacto shift in oil market pricing. According to a new survey from ConvergEx Group, the price of oil is only about $17/bbl away from signaling an inevitable global recession.

Middle East

The World economic Forum in Davos last week brought a lot of new insight. Despite falling prices, most likely the Middle East countries are going to increase oil production to compensate for their losses. The countries could follow Iraq whose top official supports the oil production increase to compensate for collapsing prices. "Because of the new challenges, especially the price of oil, Iraq has to try its best to raise it oil production and exports," Deputy Prime Minister Rowsch Nuri Shaways said at the Forum, Bloomberg reports.

Iraq has already lost about half of its revenues because of the slump in oil, Shaways said. This is obvious taking into account that the oil price should be over $100/bbl for ensuring a break-even budget for Libya, Iran, Algeria, Nigeria, Venezuela, Saudi Arabia, Iraq.

While Russia needs $98/bbl, the situation is slightly worse for Kuwait - $54/bbl, Qatar - $60/bbl, and the United Arab Emirates - $77.3/bbl. So if the oil market declines further this year, Middle East oil producers could lose $300 billion in exports; and that is why Iraq is thinking about increasing its production.

USA

Declining crude oil prices have forced three major oil service industry companies to lay off workers, AP reports. This includes Apache Corp., Baker Hughes and Schlumberger, according to The Tulsa World. Apache's job cuts will likely impact several hundred employees of the Houston-based oil and gas producer. Schlumberger is letting go 9,000 of its approximately 120,000 employees. Baker Hughes, which has a research-and-development center in Claremore and other sites in Broken Arrow, Sand Springs and Barnsdall, also has announced planned job reductions.

U.S. drillers have taken a record number of oil rigs out of service in the past six weeks. Bloomberg reports 55 were removed this week alone, bringing total rigs in operation to 1,366. Analysts including HSBC say the decline shows that OPEC is winning its fight for market share and slowing the growth that's propelled U.S. production to the highest in at least three decades.

Russia

The world's biggest oil platform has begun commercial production at the Sakhalin-1 offshore project in Russia's Far East, RT reports. The Berkut rig is expected to extract 4.5 million tons of oil per year. The Sakhalin-1 Consortium was formed in 1996 and made up of the US major ExxonMobil (30 percent), Japan's Sodeco (30 percent), Russia's Rosneft (20 percent) and India's ONGC Videsh (20 percent).

Russia's deputy prime-minister Arkady Dvorkovich insists his country will find its footing and ultimately emerge as a winner despite the collapse in oil prices that has wreaked havoc on the nation's economy, CNN reports.

Dvorkovich said low oil prices would force Russia to be smarter about its future energy investments. The country would also diversify, by seeking new customers in Asia as Europe tries to reduce its dependence on Russia's natural gas supplies.

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Vagif Sharifov, is an oil markets expert, development director at Trend Agency. Follow him on Twitter: @VagifSharifov

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