Oil follows iron ore's downward spiral

Oil follows iron ore's downward spiral

14 October 2014, 07:11
Stuart Browne
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There is mounting chatter in commodities circles that the oil price is falling just as fast as iron ore because major producers are ramping up output to put pressure on new market entrants.

The iron ore majors, led by BHP Billiton and Rio Tinto, have emphatically denied they are deliberately ramping up Pilbara output to drive down the steel ingredient's price to hurt smaller and newer rivals. The iron ore price has slumped about 40 per cent this year, and was last night $US80 a tonne imported to China.

The Pilbara giants' denials have failed to ward dent the critical perceptions, and now the focus is shifting to allegations of similar practices in oil.

Despite continued unrest in the Middle East, the oil price is plummeting. The benchmark Brent crude price was $US115 a barrel in June but has fallen to $US87/b since. With the oil price already under pressure from the massive shale-fuelled production ramp-up in the US, news agency Reuters has claimed the world's most important player Saudi Arabia is refusing to cut its output despite the falling price.

Citing market sources, the agency said Saudi, which is the biggest producer in the Organisation of the Petroleum Exporting Countries cartel, had eased up on a long-standing practice of throttling output to ensure crude does not fall below $US100/b.

Saudi Arabia is more intent on protecting market share. Saudi, which produces 9.7 million barrels a day, is also ready to accept oil prices below $US90/b and possibly as low as $US80/b for a period of up to two years, according to the Reuters report.

Such volume pressure from Saudi Arabia could play havoc for the raft of shale-oil producers in the US, where Pilbara iron ore giant BHP is one of the bigger players.

After splurging more than $20 billion on establishing a major onshore foothold in the US, BHP has been forced to focus on liquids-rich areas after the shale revolution led to a glut of gas production and an accompanying price slump. There is a view that some US shale producers need a crude price of $US70/b to remain profitable.
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