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OPEC Cap May Not Be Enough to Sustain Oil Price at $60 Long Term

Oil prices have fallen slightly again on Friday, pressured by the strong dollar though trading is very light with Thanksgiving in the U.S. and moves being put on hold until the result of next week’s OPEC meeting. International Brent Crude prices on futures slipped 0.9% with WTI Crude futures 0.8% down. Prices are expected to show little movement from now until the November 30th OPEC meeting next Wednesday.

On a longer term outlook, a Bloomberg article yesterday cast doubt on the likelihood of an oil price surge to around $60, which would be expected in the case that OPEC confirm an output cap on Wednesday, holding for any length of time. In an interview with Bloomberg Television, Fatih Birol, executive director of the Paris-based International Energy Agency, stated his belief that $60 oil would spark increased production elsewhere, particularly from U.S. shale producers. This would lead to a new supply increase that would again lead to downward pressure on oil price within 9 months to a year. Birol believes that a longer term strategy is required if higher prices are to be sustained and an OPEC cap agreement will not, in isolation, prove to be sufficient.

Earlier this week a research note by Goldman Sachs focused on the wider world economy’s need for higher oil prices. While higher oil prices push up the price of fuel, which is a negative to the world’s economy, Goldman Sachs believes that this would be outweighed by the injection of capital and liquidity into the financial system that higher prices would likely mean. Major oil producers would, the investment bank argues, put excess revenues from higher oil prices back into the international banking system. Banks would use that capital to increase lending at reduced interest rates, which would boost liquidity, asset values and consumer confidence.

As with oil, light trading has meant gold has not shown a great deal of movement in the last day, after a 10-month low on Wednesday. With the strong $1200 support level having been breached, the next major support point would be expected to be $1171 unless there is rally, which is probably not the most likely scenario in the short term with the U.S. dollar and equities continuing to look strong.
Base metals have shown consolidation on the London Metals Exchange this morning with three-month lead, zinc and copper prices all slightly up again with 0.8%, 0.6% and 0.3% gains. Tin prices have dropped slightly and are down 0.9%.

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