Record oil price fall 'nice headache' for buyers

Will Green is news editor of Supply Management
6 January 2015

A fall in the price of oil to a five-year low is a “nice headache to have” for buyers.

The price of Brent oil has today hit $52 a barrel against a background of weak demand and overproduction. OPEC reported that its basket of 12 crudes stood at $51.91 on Friday, a low it has not hit since 2005.

Damien Cox, analyst at EnergyQuote JHA, said: “It’s a boon for the average buyer. You have falling prices; it’s only going to be good.

“I think it could give them a headache: when do I commit? It’s at 52 [dollars a barrel] and I don’t think we’re done yet. It’s a nice headache to have: do you take your money off the table now or do you wait and see how far prices go?”

Cox said shale gas production in the US had reduced oil imports and led to “a pooling around the world”. At the same time OPEC decided at the end of last year not to reduce production, and Cox said this could be part of an attempt by Saudi Arabia to win market share in light of the threat from US shale production.

Meanwhile, demand from key importer China has reduced as the economy slows, while a strong dollar and a weak Eurozone have also played a part in reducing global demand, said Cox.

Phil Bulman, managing consultant at Vendigital, said the price drop would force the energy sector to cut costs. “Mounting speculation that the price of oil could fall to $40 per barrel in 2015 is forcing many of the major oil companies, and the oil and service businesses that supply them, to rethink their investment plans, and in some cases, step up their cost-cutting programmes,” he said.

“Businesses need to make sure they are in a position to wind up or down different assets quickly, depending on their total cost of ownership and the contribution they would be expected to make to the company’s operating profits.”

Andrew Buckley, director general of the Major Energy Users' Council, warned low oil prices in the long term would have implications for the development of nuclear and renewable energy.

“This unexpected Saudi power play within OPEC is having a beneficial effect for customers in the short term,” he said. “What remains to be seen is where it goes from here. If it’s long term then Britain clearly has to reappraise its energy policy.”

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