Where next for the plummeting oil price?

London (Platts)--16Oct2014/643 am EDT/1043 GMT

As the global oil price plunge continues mostly unchecked, analysts have begun to focus squarely on how low the price can go and what -- if anything -- could halt the decline.

With crude futures on October 15 falling to new four-year lows, the market is still getting its direction from a weakening demand picture, as described by the International Energy Agency on Tuesday, and the fact that oil producer group OPEC has shown no sign of reining in supply.

ICE Brent crude hit its lowest level since November 2010 earlier October 15, falling to $83.74/b, while NYMEX WTI crude was hovering close to $80/b for the first time since June 2012.

"Oil markets are struggling to find a floor," Credit Suisse said in a note Wednesday.

The bank also said it was cutting significantly its oil price forecasts for the first quarter of 2015, reducing its estimate for Brent from $95/b to $87/b and WTI from $85/b to $77/b.

"There is no sign that futures markets or physical markets are any closer to balancing, or finding some stability," it said.

Other banks have also cut their oil price forecasts -- Bank of America Merrill Lynch said Wednesday it was reducing its Brent price estimate for 2015 as a whole from $108/b to $98/b, and for WTI from $96/b to $90/b.

Most analysts believe there is room still for prices to fall further from the current lows, especially if OPEC does not act decisively to cut supply at its next meeting at the end of November.

"If the price decline is viewed as fundamentally driven, then moves to rebalance the market will merit strong consideration," IHS Energy said in a note.

"If little or no action is taken, market momentum could push prices to $80/b or lower for Brent," it said.

SAUDI ACTION, INACTION

One of the main factors pushing the price down has been Saudi Arabia's move to cut its official selling price -- suggesting it is most interested in defending market share.

Analysts also believe Saudi Arabia could be happy to see the price fall to render US shale oil production less economical.

"Saudi Arabia appears willing to accept a lower oil price, but what is motivating the largest OPEC producer here?" analysts at Commerzbank ask.

"One goal could be to force the other OPEC members to accept a greater share of any later production cut so that it does not have to bear the main burden itself," they said.

"Another objective could be for a lower price level to put the brakes on supply growth in other countries -- worthy of particular mention in this context is the US, which in recent years has accounted for the lion's share of increased non-OPEC oil production."

Analysts at Bank of America Merrill Lynch agree.

"A dip in prices could benefit Saudi Arabia by slowing down American shale oil investments and thus keep the US engaged in the Middle East for longer," they said.

"Higher inventories reduce the risk of a major spike and thus mitigate the likelihood of a European or Asian recession."

But there is still Saudi Arabia's own budgetary needs to take into consideration.

"Saudi Arabia's government budget break-even oil price level is $85/b in our estimates," Bank of America Merrill Lynch said, adding that Riyadh could consider cutting output if prices remain low.

HOW LOW?

Much attention has been given to how low the oil price can fall before it makes significant chunks of production uneconomical, especially in the US light, tight oil sector.

The IEA said Tuesday that roughly 2.6 million b/d of oil production was vulnerable to a Brent oil price below $80/b.

But despite widespread speculation that US shale oil would be the biggest casualty from the price downturn, the IEA concluded that most light, tight oil production in the US would still be profitable at a Brent price below $80/b.

Only 4.2%, or some 150,000 b/d, of the total US shale oil and condensate production is under threat due to breakeven levels above $80/b Brent, it said.

But IHS Energy warned that the dynamics of tight oil production and the financial behavior of many tight oil producers do point to the possibility of a deceleration in the pace of US production growth in a falling oil price environment.

"Especially if prices for WTI tumble below the $70-$80/b range," IHS said.

It added that if demand weakened further and oil supplies were not curtailed, then an oil price collapse below $70/b could materialize.

"Given ample oil supplies, further signs of weakening demand could have a disproportionate impact on price -- and a potential price recovery," it said. But others believe the lower limits may be close to being reached.

"We think the market is close to fully pricing in downside risks. We think the talk of market oversupply is somewhat overdone, particularly in the US where product inventories are running well below the five-year average," analysts at ANZ Research said in a note October 15.

--Stuart Elliott, stuart.elliott@platts.com
--Edited by Alisdair Bowles, alisdair.bowles@platts.com

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