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Oil price continues to collapse a day after OPEC stands firm on production


Oil futures traded near a four-and-a-half year low in Asia Friday after prices went south after Organization of the Petroleum Exporting Countries decided not to cut oil production quota to help boost oil prices.

Nymex West Texas Intermediate crude has fallen below the $70 level and was trading at its lowest since May 2010, and Brent crude, the global oil benchmark, was at its lowest since August 24, 2010.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in January CLF5, -7.23% traded at $68.25 a barrel, down $5.44 in the Globex electronic session. January Brent crude on London’s ICE Futures exchange fell $0.83 to $71.75 a barrel.

Oil prices have lost around 35% of their value since June this year and OPEC’s decision to maintain its current production ceiling of 30 million barrels a day does little to remove the glut that is keeping oil prices low.

OPEC’s decision also sets the tone for oil prices in the next few months as markets will have to adjust demand and supply on their own, instead of depending on oil producers like OPEC to make the adjustments.

The last three oil price shocks that hit the world economy over a span of 16 years saw sharp drops in global oil demand, but this time oil demand, although slower, is still growing. “The question now is how the supply adjustment process will unfold, and under what timeframe,” analyst Leo P. Mariani at RBC Capital Markets said in a report.

A boost for Asia: While oil producers will take a hit as low oil prices squeeze revenues, oil consumers stand to benefit.

Low oil prices are a big positive for Asia in particular. With the U.S. becoming more self-sufficient in oil production and Europe’s oil demand falling, Asia is the largest remaining importer of oil in the world. Opinion: Americans, let’s be thankful that U.S. oil is pulverizing OPEC

China, the world’s second-largest consumer of oil, is likely to enjoy at least another year or so of low commodity prices, which will give Beijing more leeway to loosen monetary policy, according to Julian Evans-Pritchard, a Singapore-based China economist at Capital Economics.

China is expected to become the largest net importer of oil in 2014, according to the U.S. Energy Information Administration.

Other major oil importers in Asia like India and Indonesia will also get a major boost as their current account deficit narrows, and the subsidy bills footed by local governments shrinks.

For Japan too oil prices are a positive, but some of the impact has been blunted by a weaker currency.

“Whether businesses and consumers benefit from the drop in oil prices are not clear. Many Japanese oil buyers use the yen, which has weakened sharply against the dollar recently,” Ryoma Furumi, deputy manager of the commodities team at Aozora Bank said.

Meanwhile, oil producers in Asia Pacific are bracing for tougher times ahead.

Malaysia’s fiscal position is at risk as the government relies heavily on the petroleum sector for revenue. About 30% of its annual funds comes from the oil and gas sector and Malaysia’s state-run oil and gas company, Petroliam Nasional Bhd or Petronas, is a major contributor to the government budget.

A decline of $10 per barrel in average crude oil prices will reduce Malaysia’s government revenue by about 4.0 billion ringgit ($1.2 billion), according to RHB Research Institute.

The Australian government also relies on rising energy exports and massive investments in oil-and-gas projects to cushion the blow of a sharp decline in minerals spending and prices. Its booming liquefied natural gas sector sells vast quantities of the fuel at oil-linked prices.

The slide in oil has sparked heavy selling of energy stocks, battering the resource-heavy Australian share market Friday, although some other industrial segments like transport services and airlines may benefit from oil prices.

Nymex reformulated gasoline blendstock for December RBZ4, -6.63% — the benchmark gasoline contract–fell nearly 6% to $1.9176 a gallon, while December diesel traded at $2.2905, 1060 points lower.

ICE gasoil for December changed hands at $652.00 a metric ton, up $8.75 from Thursday’s settlement. (Reuters)

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