Opec meeting in Vienna: 3 reasons why it matters to you

A pier at Kuwait's Al-Ahmadi refinery, just north of Al-Shuaiba, 30km from Kuwait City, in 2005. -- PHOTO: AFP
A pier at Kuwait's Al-Ahmadi refinery, just north of Al-Shuaiba, 30km from Kuwait City, in 2005. -- PHOTO: AFP

The Organisation of Petroleum Exporting Countries - Opec for short - meets in Vienna on Thursday for what eveyone is calling a pivotal decision on whether to cut the amount of oil it produces in the face of a global supply glut that has sent crude prices plunging to their lowest in four years.

Here's why you should take note:

1. Opec controls more than a third of global oil supply

The cartel pumps out 43 per cent of the world's crude and the fact that it's 12 member nations have not agreed so far to cut production has been one big - if not the biggest reason - why oil prices have plunged.

How much have oil prices fallen? By about one-third, or 30 per cent, since June:

US benchmark West Texas Intermediate (WTI) for January delivery fell to US$73.14 while the European benchmark Brent crude for January was down to US$77.28 in mid-morning trade on Thursday - their lowest since September 2010.

It's true that the highest U.S. oil output in three decades and signs of slowing demand for oil globally has also affected crude prices. But Opec as a whole still controls a large chunk of the world's oil supply and remains the biggest force to be reckoned with.

2. We could be on the brink of a global oil price war

Opec is under pressure from its poorer members like Venezuela and Ecuador to cut output as tumbling prices have slashed their oil revenues.

But Saudi Arabia, the world's top producer, and its Gulf neighbours, have so far rejected calls for a cut unless they are guaranteed market share.

Saudi Arabia in particular is afraid of losing market share to the United States if oil prices go up as a result of supply cuts. As the cartel's biggest and wealthiest member, it can also hold out the longest in the game of chicken with US producers.

Now Opec members are already not abiding by their group's production cap - the cartel pumped 30.6 million oil barrels per day last month instead of its 30 million bpd target.

Most analysts predict the cartel will at this meeting agree to just trim this excess supply rather than cut its official ceiling. But this or other token gestures will not stop the oil price slide, say analysts.

How low can oil prices go?

Try US$60 to US$65 for West Texas Intermediate and US$70 a barrel for Brent.

Analysts say they will need to drop another 10-20per cent to those levels to really hurt the profit margins of US shale oil producers, who will then be forced to cut production, allowing oil prices to recover.

3. Asia is and will be the most affected

Asia - Singapore included - is the world's largest oil-importing region so falling prices reduce the region's massive import bill, cutting costs for businesses and consumers and giving central banks room to lower interest rates at a time of slowing global growth.

In India, which imports 80 per cent of its oil, the key stock index has risen the most among Asian indexes this year as crude slumped.

For countries like India, Indonesia and Malaysia, falling oil prices have given governments more leeway to cut or end costly fuel subsidies.

For Japan, cheaper oil puts more money in consumers' pockets, in itself a plus for the economy. But it also risks stoking the deflation threatening the economy by reducing pressure on consumer prices.

For China, the unprecedented happened this year: It became a net oil exporter in October, as imports dived 22 per cent and exports soared 30 per cent to a record high. Commodity news service Platts says China is likely to end up a net exporter of oil this year. What China wants then is not for oil prices to continue to fall but for prices to stabilise.

In fact oil prices falling so sharply can be a double-edged sword for Asia.

Crude's weakness signals slowing demand from China and Europe, a development that risks hurting Asia's export-dependent nations like South Korea and Singapore.

Said Bank of America Merrill Lynch economist Chua Hak Bin: "If we believe that the decline in prices has been due to supply-side factors rather than a collapse in demand, then Singapore as a net oil importer should benefit from the lower costs."

One big plus - it reduces inflationary pressures in Singapore as transportation costs are lower.

But a sustained fall in oil prices could affect certain sectors of the economy, he noted, such as refiners and rig builders.

"Already we have seen signs of slowing orders," Dr Chua said.

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