![The price of crude oil has been on the decline since mid-2014.](/web/20151216185554im_/http://www.theage.com.au/content/dam/images/g/l/l/w/m/7/image.related.articleLeadwide.620x349.gll7fu.png/1449867011513.jpg)
The price of crude oil has been on the decline since mid-2014.
OPEC's demise has been called many times over the past few decades – but the cries have grown more insistent since it failed last weekend to limit oil production.
The cartel of large, mostly Middle Eastern, oil producers, is riven by a split between Saudi Arabia, the dominant oil producer, and its arch Middle Eastern rival, Iran, which is set to recommence oil exports now that trade sanctions blocking it from exporting have ended.
The resources sector is set for more pain. Commodity prices are going to stay low for quite some time.
HSBC economist Paul Bloxham
It failed to cap oil output when it met last weekend. It did so at a time when demand growth is sluggish and oil inventories are at peak levels.
![Anglo American boss Mark Cutifani says "nothing can be considered business as usual".](/web/20151216185554im_/http://www.theage.com.au/content/dam/images/g/l/j/8/8/b/image.related.articleLeadwide.620x349.gll7fu.png/1449867011513.jpg)
Anglo American boss Mark Cutifani says "nothing can be considered business as usual". Photo: Sean Davey
This opened the door to a dive in the oil price which commodity traders argue oil could fall a further 10-15 per cent before it bottoms amid an oil production 'free-for-all'. And with forecasts of a warm northern hemisphere winter to also undercut demand in the next quarter, prospects of a turnaround are slim.
The price of crude oil has been declining since mid-2014, falling below $US37.75 during the week, with forecasters now tipping it could slide further to bottom around $US33 a barrel. Investment bank Goldman Sachs has been even more bearish, forecasting the oil price could fall below $US30 a barrel amid continued oversupply.
Coming against the backdrop of a slowing China and weakness in the US and Europe, oil producers have now joined miners in a sharp pincer as commodity prices and asset values have plunged.
![Ginia (left) and Gina Rinehart at ceremony of first shipment of iron ore from Roy Hill Mine at the port facilities at Port Hedland, WA.](/web/20151216185554im_/http://www.theage.com.au/content/dam/images/g/l/k/a/u/a/image.related.articleLeadwide.620x349.gll7fu.png/1449867011513.jpg)
Ginia (left) and Gina Rinehart at ceremony of first shipment of iron ore from Roy Hill Mine at the port facilities at Port Hedland, WA. Photo: Philip Gostelow
Mark Cutifani, the boy from Wollongong who runs Anglo American – best known for its De Beers diamond unit – was caught in the eye of the storm this week, forced to slash tens of thousands of jobs worldwide as it dumps unwanted assets amid the never-ending downturn in commodity prices.
"We've seen pretty aggressive reductions over the last two or three months," Cutifani said of the fall in commodity prices.
"In this sort of environment nothing can be considered business as usual."
![The first shipment of iron ore from Roy Hill Mine on the MV Anangel Explorer at Port Hedland on Thursday will add to the over-supply.](/web/20151216185554im_/http://www.theage.com.au/content/dam/images/g/l/k/b/g/h/image.related.articleLeadwide.620x349.gll7fu.png/1449981622536.jpg)
The first shipment of iron ore from Roy Hill Mine on the MV Anangel Explorer at Port Hedland on Thursday will add to the over-supply. Photo: Philip Gostelow
He put some of his coal mines in Queensland and NSW on the market at the start of the year, with no takers, so now he is ramping up his restructuring plans.
So too is Glencore, another troubled global miner, which this week doubled to as much as $US4 billion its planned asset sales while putting assets such as the Murrin Murrin nickel mine in Western Australia on notice for closure as it cuts output at its coal and base metal mines in Queensland to reduce borrowings.
Speculators making hay
For market speculators, the swift downturn in commodity prices has provided the perfect opportunity to short sell companies with heavy debt loads and a large exposure to the oil price – such as Santos and Origin Energy – as prospects for a rebound in the price of oil recede further into 2016 or beyond.
Over the past few weeks, global investment banks have been steadily cutting their oil price forecasts amid wariness that the oil glut will not be cleared anytime soon. Along with the inability of OPEC to limit production, the US has now emerged as the 'swing' supplier with its massive oil shale industry able to turn supply on and off, giving it increased clout over energy markets.
Recent data from the International Energy Agency highlighted a 3 million barrel oil "cushion" of crude oil stocks, quite apart from around 40 million barrels of distillate inventories that have accumulated so that even the recent "galloping" demand for crude oil from India is failing to soak up the surplus. It will release updated data over the weekend which is not expected to show any fundamental change.
The falling oil price is good for the global economy and also Australian households, as their fuel bill declines. But since Australia is a large energy exporter thanks to shipments abroad of coal and gas, for state and federal governments, the decline will squeeze revenues from taxes and royalties, deepening budget deficits.
"Commodity prices will remain low for 2016 – lower for longer. It will take time to rebalance," said HSBC economist Paul Bloxham.
"The resources sector is set for more pain. Commodity prices are going to stay low for quite some time."
Chinese demand is weak
Demand from China in particular is weak as it seeks to shift its focus of economic activity towards the services sector and away from manufacturing, he said. And supplies are rising still, as new producers such as Gina Rinehart's Roy Hill iron ore mine start up, while it is taking time for higher cost producers, for example iron ore mines in China, to exit the market.
"With oil, OPEC's strategy was to maintain supplies, to force US production to reduce, especially shale oil production," HSBC's Bloxham said. "We've seen some reduction, but shale producers have cut costs and continued to produce, so that its ongoing supplies are keeping prices low.
"It will take a while yet for commodity prices to bottom and to lift – and some time yet for any rebound."
Commonwealth Bank economist Michael Workman reckons the price of oil could fall another 10-15 per cent.
"In the short term, it looks to be going lower. OPEC demonstrated the difference of opinion between the Saudis and Iran. Iran will be allowed back into the export market and the market reacted to OPEC's non-agreement to cut output."
Iran will ramp up exports to around 3 million barrels a day over the next 18 months or so, keeping the oil price low and raising pressure on high-cost producers in Russia, for example, to shut down.
"For commodity producers what's going on in oil is diabolically bad – even for Middle Eastern producers," CBA's Workman said.
"It's purely about high cost producers cutting high cost wells, for example, Russia.
"Someone will close some production – otherwise the oil price would be $US15 a barrel. The downside to the price of oil is limited by high-cost producers closing uneconomic production.
"Unless there is a significant withdrawal of supply we can't expect much of a rebound. And Australian thermal and coking coal producers will feel the pain."
At present prices, few coal producers are profitable, for example, cushioned only by the prospects of a weaker Australian dollar. Wood Mackenzie estimated this week two-thirds of global production is unprofitable.
"At the macro level [the commodity price weakness] will impact the terms of trade," Commonwealth Bank of Australia economist Diana Mousina said. "And the currency will respond as well."
Aussie dollar to "fall 10 per cent"
Low commodity prices will see the Australian dollar slide more than 10 per cent to US65¢ over the next three months, the CBA forecasts, a result as well of the anticipated rise in US interest rates.
For energy groups, the pressure was exemplified this week by Chevron, which is developing the giant Gorgon gas field off Western Australia. It has slashed spending for 2016 by a quarter to $US25 billion hard on the heels of a 10 per cent cut to its workforce.
"We see a soft first and second quarter of 2016, with the market moving more into balance from mid-year and strengthening into 2017," the oil analyst for one global investment bank said. "The rebalance will be partly due to incremental growth in consumption with a pull-back in production by non-OPEC producers and on-shore US producers."
In particular, shale oil producers in the US such as BHP, are seen increasingly as "swing" producers able to bring wells into production quickly which will keep a cap on oil prices rising too far, analysts said.
In analyst briefings this week in the US, oil services companies such as Halliburton have signalled a "double-dip" for US drilling activity following the latest oil price slide, with a further squeeze on margins and no let up in the year ahead. And Australia will be one of the hardest hit, Halliburton's interim chief financial officer Christian Garcia told analysts.
"If you look at Australia, rig count has gone down about 35 per cent since the beginning of the cycle so it is going to be getting hit pretty hard," he said.
Structural changes will add to the gloom
And while OPEC bickers, structural change is continuing apace. Auto maker Toyota, for example, this week unveiled the fourth generation of its hybrid car, the Prius, which will slash fuel consumption to 40 kilometres a litre of fuel up 25 per cent from current Prius models as it works to bypass using any fuel oil in future models, pinning its hopes on hydrogen for future models.
The sustained slide in commodity prices has kept concerns about deflation emerging elevated, although economists say disinflation is underway at present as inflationary pressures are squeezed.
"Globally, inflation is very low and part of that is due to excess capacity, particularly in China," HSBC's Bloxham said. "Inflation there is too low, and they are keen to lift it."
Similarly in Europe and Japan, he said.
"The US is looking to raise rates next week, but inflation is well below targets. At the moment, it is disinflation, rather than deflation. But for high debt level countries that could be challenging.
"In Australia, inflation is low, but there is not a deflationary risk. The RBA still has room to move."