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Financial News

Oct 2014 Financial News

Threat to T&T from falling oil prices

Oct 09, 2014

A prominent rating agency’s prediction of a drop in global oil prices could have serious implications for the T&T economy since the national budget is based on an oil price of US$80 per barrel (bbl) for West Texas Intermediate (WTI). London-based Fitch Ratings, in an analysis published yesterday, said Brent oil, which generally trades US$10 bbl higher than WTI, could fall as low as US$80 bbl.

“The notional floor is well below the US$100/bbl level that many market participants thought was here to stay earlier this year. “But in the last two weeks Brent crude has fallen—and stayed—significantly below US$100/bbl, and WTI crude has fallen below US$90/bbl for the first time since 2012. The difference between the two benchmarks has shrunk to around US$2.50, and forward curves also indicate weakness,” Fitch Ratings said.

“In the short term we consider a resurgence of supply disruptions and positive action from Opec the most likely catalysts for a rebound in prices. But without these, further declines might be possible, especially if evidence grows of further weakening of global demand or increasing Opec spare capacity.”

The agency said conditions for an oil price higher than US$100 bbl include “growing demand, tight Opec spare capacity, increasing cost of supply, particularly combined with rapid depletion rates for shale wells, Opec’s desire for high oil prices, and political and security issues in key regions.”

“Demand has been the clearest change in the short term, but is also the element that may most reliably reverse in the long term. If China and India grow as expected demand could rise by up to a third in the next 20-30 years—but this does not preclude short-term weakness.”

Fitch said while Opec has declared support for prices at US$100 bbl and Saudi Arabia, which would have to absorb the greatest production cuts, would be able to balance its budget at US$94 bbl, a lot depends on the outcome of Opec’s next meeting in November. “The geopolitical and security picture has not resulted in the predicted fall in production. 

“Progress is being made on Iranian sanctions; Iraqi production has remained robust; Libyan production is starting to recover. Market sentiment suggests the effects of these situations will remain benign—but there is potential for this to reverse quite rapidly,” the ratings agency said.

Fitch said the rising US dollar, which has strengthened against the euro by around ten per cent since the middle of the year, is also contributing to weakness in oil prices. The price of oil was down US$1.41, or 1.6 per cent, to US$87.44 in trading yesterday. Asked for a response yesterday, Energy Minister Kevin Ramnarine told the T&T Guardian he had “nothing as yet” to say on the matter. Up to press time Finance Minister Larry Howai had not responded to e-mailed questions.

 

Source:
Trinidad Guardian
Thursday October 9, 2014

http://www.guardian.co.tt/business/2014-10-09/threat-tt-falling-oil-prices