São Paulo – Oil barrel prices have bottomed out to their lowest in two years this week due to heightened supply and weak demand. The industry expects prices to remain around US$ 85 per barrel of the Brent Crude oil type (traded on the London Stock Exchange) for the next few months. If the trend bears out, major oil companies will have to revise their investment and debt plans. Even major global producing and exporting countries will need to cut down their spending.
According to the global news director at New York’s commodities consulting firm Platts, John Kingston, oil prices are bearish because the world economy is in “big trouble” and recovering slowly. Conversely, production and supply are on the way up.
“Demand is sluggish and growth is very slow around the world, which is still depending on the recovery of the United States’ economy,” Kingston told ANBA.
The director of the Brazilian Infrastructure Centre (CBIE), Adriano Pires also believes the world economy is recovering very slowly. He remarks that recent conflicts in Middle East countries like Palestine and Syria, coupled with the Ukrainian crisis, had postponed the price drop. Besides, the United States’ output is strong right now and investment projects rolled out over the past few years are beginning to bear fruit, causing exploration to increase.
Pires notes, however, that the commodity’s price has ups and downs. It peaked in 1973 and 1989, and plummeted in 1986 and throughout the 1990s. In 2008, however, oil sold for as much as US$ 140. By October 15th, 2012, the Brent barrel was selling for US$ 115.07. A year later, it cost US$ 110.86. This Thursday (16th), it closed at US$ 86.12.
Prices may keep falling, but not much further. Pires expects them to remain close to US$ 80. They may even increase slightly in the days leading up to the Organization of Petroleum Exporting Countries (Opec) meeting scheduled for late November. Countries like Venezuela and Libya want to reign in output so prices will rise, driving up revenues. Kuwait and Saudi Arabia, for their part, would rather wait longer before slowing the output down.
The impact will likely not be as strongly felt by the United States. The country is producing oil domestically through unconventional gas extraction, thus reducing its dependence on imports and their influence on the country. Extraction of this type of gas and oil costs more, but Kingston claims some producers can “withstand” prices as low as US$ 70. “It all depends on the extraction technology and the productivity it affords,” he says.
The effects on Brazil
Low oil prices may influence the Brazilian federal government and Petrobras’ decisions in the short, medium and long run. According to Pires, plummeting oil prices relieve pressure on the government to raise fuel prices, which have been kept lower than they should be in order to curb rising inflation.
On the one hand, lower prices will also drive down costs for Petrobras. The downside is they should weigh down on the state-owned company’s revenues. “These prices will cut losses for Petrobras, but they will also jeopardize its investments, because the company is working with a price estimate of US$ 100 until 2018, and then with US$ 95. If this scenario persists, then Petrobras and other oil companies will have to reformulate their investment strategies,” he asserts.
*Translated by Gabriel Pomerancblum
