No need to panic over oil prices

Stock markets in the Middle East and the Gulf are being driven down by panic-selling by investors fearing budget cuts due to lower oil revenues, forcing the postponement of government infrastructure projects or reductions in subsidies. This bearish mood is driven by sentiment and has little relation to fact.
Gulf countries enjoy stable economies premised on strong fundamentals and have built-up healthy fiscal reserves; thus, they are well-placed to ride this current wave. Bloomberg Businessweek quotes Saleem Khokhar of NBD Asset Management Group saying, “Valuations have become quite attractive and I expect the markets to stabilize soon.”
The diving price of oil is fall-out from overproduction predominantly caused by US fracking and horizontal drilling that has increased America’s oil-producing capacity by almost 50 percent to 7.4 million barrels per day in just six years. Oil prices have slumped due to a glut consisting of two million barrels a day over-supply. As of now, the US is not only benefiting from energy self-sufficiency but this year it emerged as the world’s number one producer. Falling prices at the pump benefit consumers and the specter of inflation is being held at bay. But US authorities are taking a very short-term view. Should cheap oil hit the economies of America’s trading partners in a major way, US exporters will feel the pinch and jobs will be lost. Another factor keeping prices low is increased production by Iraq and Libya.
Some countries are suffering hits more than others better able to withstand shocks. Indices have fallen sharply just about everywhere on the planet but have dived in China, Russia, Canada, Venezuela and Nigeria, prompting conspiracy theories. For instance, the head of Russia’s Foreign Intelligence Service is convinced oil markets are being manipulated by Washington to attack the ruble. Indeed, analysts are predicting that reduced revenue from oil coupled with western sanctions could send the Russian economy into recession. On Friday, the ruble hit historic lows against the US dollar and observers note that Moscow is purchasing gold at an unprecedented rate as a buffer.
Canada, whose oil and gas exports account for a major chunk of the country’s GDP, is also hurting with its currency hitting new lows. The country’s shale and sand oil is costly to produce and should prices continue to free fall, it will not be competitive on the market. Oil companies will be loath to invest in new projects and may suspend those in the pipeline.
However, there are oil-importing nations that are laughing all the way to the bank. For Germany, cheap oil is the key to economic stimulus. China is another beneficiary. The Economist reports that “based on 2013 figures, every $1 drop in the oil prices saves it an annual $ 2.1 billion,” while inexpensive oil will help India to cut its budget deficit. Likewise, the faltering Turkish economy is receiving a boost, its stocks outperforming those in emerging markets.
Certain western countries accuse OPEC of launching a price war to beat back US competition, although, again, this premise is more theory than fact. The Bank of America believes that, in the event oil prices descend to $55 a barrel, companies producing shale “will be under water.” OPEC has been under pressure to cut production and has so far resisted, although not all OPEC member states are in accord. Those plagued by economic and political stresses, such as Venezuela, Nigeria, Libya, Iraq and Iran would prefer a quick fix to salvage their economies. Others, including Saudi Arabia and Gulf States are refusing to bend because, as they see it, there would be no such constraints on non-OPEC producing countries to stem their flows and nothing preventing them from upping their outputs, which would defeat the object.
A theory expounded by Andrew Critchlow, the Telegraph’s Commodities Editor, suggests Washington is set on weakening OPEC’s leverage: “US politicians spent much of the past decade plotting how to break OPEC’s grip on oil prices, but now the country’s Department of Energy will soon hold what appears to be its own version of the oil group’s regular ministerial gatherings in Vienna. Critchlow believes trilateral talks between Mexico, Canada and the US will pose “a credible threat to OPEC’s dominance of the oil market.”
We’ve yet to see which side of this complex conundrum will blink first as oil jitters are beginning to rattle global bourses. OPEC has the cure. It wants non-OPEC producers, such as Russia, Mexico, Venezuela, Norway, the US and Canada, to sit around the table with OPEC member states to agree on a way forward vis-à-vis cuts in production. Take the politics out of oil. Remove the cutthroat competition… at least for now. And market traders and investors will sigh with relief before resuming business as usual.