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Is $40 a barrel the floor for Oil?

The price of Oil has collapsed since the start of the year, with concerns of the global recovery being derailed. Oil producing nations, who rely on the black gold for revenue, are in risk of having to cut expenditure following the commodity rollercoaster. US Oil (WTI Crude) has traded below $60 for the first time in 5 years on Thursday and there is a concern that there could be further to fall.

Countries that are expected to suffer are net exporters of Oil, and rely primarily on government revenue from production. Venezuela’s economy is on the brink collapse, and the Nigerian economy highlighted as a potential risk.

Analysts have slashed forecasts as the price of Oil has crashed, with 70, 60, 50 and now 40 dollars being sighted as the floor for the commodity. The expectation is for M&A amongst producers, as valuations have tumbled on the back of the collapse.

As the price of Oil rocketed, the break even for production rose, as large scale investment into projects such as deepwater drilling. The higher price for Oil meant that these projects were economical, however at the current price of Crude they are producing at a loss. BP has already announced a $1bn restructuring charge, and will be reassessing capital expenditure due to the lower price.

The dramatic decline in exchange prices are yet to be felt by consumers, as the price reduction will take time to filter through. Analysts have highlighted the decline in prices will be a benefit for the general public who will have lower costs, and a larger disposable income. This could provide a significant and much need boost, if the public increase expenditure.

The decline in price comes at a pivotal time for the global recovery, as central banks (BoJ, BoE, ECB, Fed) maintain loose monetary policy, believing the economy would struggle with out the easing. The fall was highlighted by the SNB in their latest inflation outlook on Thursday.

Will OPEC intervene?

At the 166th meeting of OPEC, members voted to maintain production levels, which led to oil being offered, adding to the price decline. With the members of OPEC relying so heavily on production, each member is unwilling to reduce production, and hurt revenues in the short term, to prop up the price.

(At the time of writing)

UK Brent Crude January 2015: $63.25 / 28 a barrel

US Crude January 2015: $59.36 / 39 a barrel

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