amorgos34
CHIAGNI & FOTTI SRL
Jpm
OPEC Meeting: Stasis prolonged
The 166th Meeting of the Conference of the Organization of the Petroleum Exporting Countries has concluded with a reaffirmation by its members of the 30 mbd production target. Brent crude futures prices have fallen rapidly following the conclusion of the conference extending the $10/bbl decline witnessed over the course of November, largely in anticipation of such an outcome. With 1Q2015 looming large on the horizon and with reports of a bumper West African loading programme for exports already announced for January, we reiterate our view (Oil Market Monthly: OPEC stasis creates further downside price risks, 07-Nov-2014) that prices will weaken further in the coming weeks.
Commitment to the 30mbd production target highlights a flaw in OPEC’s current setup, in our view. With a collective target that no single country is responsible for delivering, they are jointly responsible but not accountable for any overproduction versus it. Furthermore, adherence over the course of 1H2015 to the target of 30 mbd is by no means assured. Compliance by member countries with agreed country-specific production targets has varied over time, with some member states better able to coordinate production levels than others. We note that reports indicate that the combined loading schedules for Nigerian and Angolan exports are set to reach fresh five year highs in January, which we expect to add to crude market pressures.
Nevertheless, even if OPEC adjusts production to 30 mbd by the start of 2015 – and that in itself seems unlikely - we note it would still be insufficient to balance markets in 1H2015. We project a total stock build in 1Q2015 of +1.3 mbd and 0.3 mbd in 2Q2015 if OPEC cuts to 30mbd. This stands far in excess of the five-year average first quarter increase in stocks of 0.4 mbd. OECD first quarter crude stocks built on average by 0.5 mbd over the past five years, while OECD product inventories typically drew by -0.4 mbd. Data from those non-OECD countries that consistently report stocks within the JODI data collection framework, point to a five-year average first quarter build of 0.2 mbd in crude and a 0.1 mbd in products.
Despite the substantial move lower in prices already witnessed today, we continue to expect that prices will weaken over the remainder of 4Q2014. The speed and depth of the adjustment in prices remains unclear at this juncture, but ultimately we continue to view lower prices as the catalyst that will motivate OPEC to cut. Today’s meeting reaffirms our expectation that Brent will likely trade under $70/bbl in the coming months, absent a material shift in projected demand, or supply. As noted in our 2015 Commodities Outlook, the alternative to OPEC reaching an agreement is a much slower adjustment process driven by adjustments to non-OPEC supply. This alternative scenario would involve lower prices than we have forecast and would take longer to achieve than we currently assume in our published forecasts. However, cuts to investment on the supply side of the market would in time set the stage for a recovery in prices, in our view, as demand growth improves in the medium term.
OPEC Meeting: Stasis prolonged
The 166th Meeting of the Conference of the Organization of the Petroleum Exporting Countries has concluded with a reaffirmation by its members of the 30 mbd production target. Brent crude futures prices have fallen rapidly following the conclusion of the conference extending the $10/bbl decline witnessed over the course of November, largely in anticipation of such an outcome. With 1Q2015 looming large on the horizon and with reports of a bumper West African loading programme for exports already announced for January, we reiterate our view (Oil Market Monthly: OPEC stasis creates further downside price risks, 07-Nov-2014) that prices will weaken further in the coming weeks.
Commitment to the 30mbd production target highlights a flaw in OPEC’s current setup, in our view. With a collective target that no single country is responsible for delivering, they are jointly responsible but not accountable for any overproduction versus it. Furthermore, adherence over the course of 1H2015 to the target of 30 mbd is by no means assured. Compliance by member countries with agreed country-specific production targets has varied over time, with some member states better able to coordinate production levels than others. We note that reports indicate that the combined loading schedules for Nigerian and Angolan exports are set to reach fresh five year highs in January, which we expect to add to crude market pressures.
Nevertheless, even if OPEC adjusts production to 30 mbd by the start of 2015 – and that in itself seems unlikely - we note it would still be insufficient to balance markets in 1H2015. We project a total stock build in 1Q2015 of +1.3 mbd and 0.3 mbd in 2Q2015 if OPEC cuts to 30mbd. This stands far in excess of the five-year average first quarter increase in stocks of 0.4 mbd. OECD first quarter crude stocks built on average by 0.5 mbd over the past five years, while OECD product inventories typically drew by -0.4 mbd. Data from those non-OECD countries that consistently report stocks within the JODI data collection framework, point to a five-year average first quarter build of 0.2 mbd in crude and a 0.1 mbd in products.
Despite the substantial move lower in prices already witnessed today, we continue to expect that prices will weaken over the remainder of 4Q2014. The speed and depth of the adjustment in prices remains unclear at this juncture, but ultimately we continue to view lower prices as the catalyst that will motivate OPEC to cut. Today’s meeting reaffirms our expectation that Brent will likely trade under $70/bbl in the coming months, absent a material shift in projected demand, or supply. As noted in our 2015 Commodities Outlook, the alternative to OPEC reaching an agreement is a much slower adjustment process driven by adjustments to non-OPEC supply. This alternative scenario would involve lower prices than we have forecast and would take longer to achieve than we currently assume in our published forecasts. However, cuts to investment on the supply side of the market would in time set the stage for a recovery in prices, in our view, as demand growth improves in the medium term.
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