OPEC’s challenge to U.S. sends tremors through markets

November 28, 2014, 1:54 PM UTC
Photo courtesy: David McNew — Getty Images

Global markets were still struggling to come to terms with a new reality of cheaper oil Friday, after the Organisation of Petroleum Exporting Countries refused to prop up prices by cutting production.

The price of oil stabilized after its biggest one-day fall since the financial crisis, while investors fled energy stocks and piled into those such as airlines, which should benefit from lower fuel costs.

OPEC’s decision was greeted with particular joy in Asia, where most countries are big net importers of oil. The Indian Sensex 30 index hit a new all-time high, while Japan’s Nikkei rose 1.2% and China’s Shanghai composite index rose 2.0%.

In the foreign exchange markets, the Russian ruble fell to new all-time lows against the dollar and euro, putting more pressure on the government of President Vladimir Putin, which depends on revenues from oil and gas exports for some two-thirds of its budget. Itar-TASS quoted Putin as playing down Thursday’s fall, saying he expected the oil market to stabilize by the middle of next year at the latest.

Moves in Europe were more mixed, as markets had already reacted to OPEC’s decision on Thursday, and weak economic data weighed on sentiment. By lunchtime in Europe, the Euro Stoxx 600 index was down 0.4%, with companies such as French oil and gas major Total SA down 3.2% and Italy’s Eni SpA down 2.9%. In London, BP Plc was down 2.1% while smaller exploration companies like Tullow Oil Plc and Premier Oil Plc were down by as much as 10.4%. By contrast, discount airline EasyJet Plc was up 0.9% after a 6% rise on Thursday, while Deutsche Post AG, the owner of DHL, was up 0.6%.

On the New York Mercantile Exchange, the benchmark front-month contract was steady at just over $69 a barrel. It hasn’t been that low since the middle of 2009, and analysts now expect it to head lower until U.S. shale producers start to cut back their investment and drilling.

Deutsche Bank’s Michael Hsueh said in a research note that prices could fall as low as $60 a barrel before U.S. producers make any “major adjustment”. That’s well below forecasts of $80/bbl bandied about in Wall Street forecasts in the last couple of weeks.

The fall in oil prices should be good news for consumers, not least in Europe, where weak wage growth and high joblessness leave few others sources of extra cash around.

Earlier Friday, Eurostat reported that energy prices in the Eurozone fell 2.5% on the year through November, driving the overall annual inflation rate to a new five-year low of 0.3%. Analysts at Credit Suisse said a bigger oil price effect next month will leave the headline annual figure close to 0%.

CS prices
Source: Credit Suisse
Source: Credit Suiss

Excluding food and energy prices, annual inflation stayed unchanged from October at 0.7%, still low enough to cause acute concern about deflation in some quarters.

Elsewhere, strong retail sales figures in Germany were balanced out by weak consumption in France and Ireland, while Italy reported a jump in its jobless rate to a new record high of 13.2% from 12.9% in October. Analysts had expected it to fall to 12.6%.