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Here's why oil prices could drop to $30 a barrel again: Fesharak

By Editing NAI
06/15/2017 12:32 a.m.

A leading global energy market academic warned that crude prices could sink back to $30 a barrel if OPEC fails to make additional cuts to production.

"The problem is that there is too much oil on the market. There is too much oil from the U.S., too much oil from Libya, too much oil from Nigeria," said Fereidun Fesharaki, founder and chairman of consulting group FGE, which focuses on oil and gas markets east of the Suez and in Europe and the U.S.

"While the demand is robust, there is a serious likelihood that prices will sink next year to $30-$35 a barrel and will stay there for a while," he told Squawk Box on the sidelines of the Credit Suisse Australia Energy Conference in Sydney on Wednesday.

Fesharaki, who has studied Asia Pacific and Middle East energy markets since the early 1980s, said he believes the so-called red line for Saudi Arabia is 9 million barrels of oil per day, and any failure to cut below that level would cause a price pullback.

"You have to cut another 700,000 barrels per day right away or prices will sink," he said. "Even if you do this, next year you'll still have to cut more, so it comes down to how far the Saudis are prepared to cut."

Late last month, OPEC said it would extend an 1.8 million-barrel-a-day cut to oil output by nine months, though March 2018, after the November deal failed to fully clear a global oversupply in oil, which has been keeping prices relatively low. Some non-OPEC producers have also signed on to the deal.

Fesharaki said his assumption wasn't just based on oversupply.

Taking a contrarian view, he also believes that a slump in crude prices could lead to a slump in demand.

"A drop in the price of oil is like an earthquake or a tsunami," he added.

"If you have a small drop in the price of oil, then actually it's good for demand and good for economic growth, but last time the price of oil fell, the stock markets fell with it. I think there is a scary environment now that a substantial drop in the price of oil would actually create a global recession."

Other analysts have previously noted that a sharp drop in oil prices can weigh heavily on the economies of oil producers, which then can see declining consumer confidence and spending.

Source: CNBC



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