Wood Mackenzie: OPEC decision undermines near-term price recovery

Wood Mackenzie

Wood Mackenzie has commented on OPEC’s recent decision not to cut current levels of production, which pushed down oil prices. On Nov. 27, OPEC held its bi-annual meeting in Vienna and retained the current production ceiling of 30 million barrels a day (b/d) effective to its next meeting in 2015. Oil futures traded near a 4½-year low on Nov. 28.

Ann-Louise Hittle, head of Macro Oils research for Wood Mackenzie, said, "Oil prices have declined by around 36% since June 2014, due to a weakening demand outlook in China and Europe combined with steady growth in US oil production and Saudi Arabia's protection of its market share in Asia. The retention of current OPEC production levels clearly puts the outlook for oil demand growth as the continued focus of crude oil pricing and, in its absence, tight oil breakeven economics. In the last year, world oil demand growth has slowed markedly and increased the difficulty in absorbing non-OPEC production growth."

Wood Mackenzie assessed the implications of OPEC’s decision and made the following statements:

  • Total world oil supply growth in 2015 will continue to outpace oil demand growth as has been the case recently in 2014. Several months ago, the outlook for 2015 was for oil demand to grow well over 1 million b/d, but with developments such as the recent recession in Japan, expected gains in demand have been scaled back. Further downward revisions in 2015 will intensify the need to cutback supply growth. 

  • There has been considerable speculation as to the motives of Saudi Arabia over recent months, as it has not cut its production significantly in spite of the drop in crude oil prices. With the agreement on Nov. 24 to extend the talks with Iran to July 2015, one key near-term supply concern for OPEC was removed prior to its meeting, as Iran's oil exports will not be stepping up in the first half of 2015. This price-supportive factor has been lost in the OPEC meeting reaction. 

  • The OPEC meeting left the group's production ceiling unchanged at 30 million b/d. This means that oil prices – as has already happened – are under downward pressure to slow the rate of supply growth.

  • Limited non-OPEC supply reduction is envisaged at the oil price levels prevailing before the OPEC meeting, due to the robust breakeven economics of US tight oil. Wood Mackenzie analysis shows that Brent needs to fall below $75 to $80 per barrel or West Texas Intermediate (WTI) below $70 to $65 for several quarters before there will be a significant slowdown in US tight oil production growth.

  • For 2015, global oil demand growth is critical to ensuring that there is an outlet for this supply increase. Wood Mackenzie's latest projection is for global oil demand to rise 0.83 million b/d in 2015, based on moderate global economic growth and China's GDP increasing by 7.1%. This is only marginally higher than 2014 demand growth and critically is lower than Wood Mackenzie’s non-OPEC annual supply growth forecast of 1.3 million b/d, resulting in a further implied stock build, particularly through the second quarter of 2015.

  • In Wood Mackenzie’s updated forecast, it expects Brent and WTI to both remain under downward pressure as the price explores what is needed to slow supply growth.

  • With Brent below $75 to $80 per barrel and WTI falling below $65 to $70 per barrel, the market will test the US tight oil price floor, and will act to slow medium-term oil supply growth beyond the US and challenge OPEC resilience to hold to its current production levels. For US tight oil, Wood Mackenzie detailed breakeven price analysis shows by end 2015, such prices could lead to at least 0.6 million b/d being removed from the market, which would curb the over-supply situation. Importantly, these prices would also send a sharp signal to the industry and have a wholesale effect on future spending plans, which will feed through to oil prices as a supportive factor.

  • There are many uncertainties that influence the crude oil price outlook. Aside from a significant increase in unplanned outages (which remains a threat in locations such as Libya), the key risk to oil price in 2015 is global economic growth and the associated oil demand. As an example, if 2015 global economic growth is closer to 2.0% compared to Wood Mackenzie’s forecast of 2.7%, Brent may need to fall below $70 per barrel to curb the oversupply in this case.

  • The lower oil prices will be painful for OPEC countries such as Iran (which is already exposed to reduced oil exports from sanctions) and Venezuela – both of which have high fiscal breakeven prices well over $100 per barrel. Geopolitical tensions, such as between Iran and the Arab Gulf nations or stability in some of these countries are further uncertainties in the wake of OPEC's decisions.

Wood Mackenzie concluded its comments by saying that renewed weakening in the oil price in early 2015, driven by slowing demand, could trigger an extraordinary OPEC meeting in the first quarter to discuss market conditions. Ministers indicated that disruption to market order will be monitored. For now, Wood Mackenzie said, OPEC producers, such as Saudi Arabia, appear comfortable with letting non-OPEC producers face the prospect of losing market share.

 



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