Oil due for further loses this week

With oil prices falling below the psychological $60 mark and showing no signs of upward movement there are rumours that OPEC countries may be considering an across the board drop output ahead of Decembers meeting in Nigeria.

Clearly this is a bluff.

One of the problems facing the oil producing countries is that in many cases their respective government budgets have increased in proportion to their enriched oil revenues. Whilst it’s always easier for governments to spend more, it’s quite difficult to move government spending in the other direction without upsetting your populous.

So its likely that even though one of the bigger producers, such as Saudi Arabia may indeed cut back, the poorer nations with more volatile populous may actually need to increase production to make up for lost revenues. Of course all of this will be done very discretely and we’ll hear very publicly about the cut back. Ironically the more these nations produce, the lower the price, so the more they’ll need to produce.

Cartels like OPEC work well under certain circumstances, such as when prices are marching upwards. But tend to be less able to control in the short term as prices decline – it’s not a simple case of ‘who blinks first’ anymore.

At the same time, other external forces are weakening the cartels hand at the moment, the situation in Iran seems to be cooling, with the prospect of a more settled negotiations proceeding. Secondly, recent figures from the US show that the economy is cooling at the moment so demand will decrease, this will also have a knock-on effect with China. Finally, the hurricane season that has wrought so much chaos over the last few years is nearly over and has been much more benign this year – lowering worries about infrastructural damage to refineries and rigs.

The US is in better shape this year with better-distributed storage facilities and the predictions from meteorologists are for a milder winter this year.

All in all, the outlook for consumers looks good. With all the cards seemingly stacked against any upward movement more investors are pulling their positions and moving into other markets. At the same time the gearing of some of the hedge funds may precipitate a faster decline in prices as managers pull out as quickly as possible to quell losses. Certainly, many hedge fund managers will probably lose their jobs before the Christmas bonus season as fund returns collapse in that sector.