WoodMac: OPEC’s decision undermines potential for near-term price recovery

The decision by the Organization of Petroleum Exporting Countries to maintain its members’ production quota at 30 million b/d directs the focus of crude oil pricing on oil-demand growth expectations and tight-oil breakeven economics, said Wood MacKenzie Ltd.

The decision by the Organization of Petroleum Exporting Countries to maintain its members’ production quota at 30 million b/d directs the focus of crude oil pricing on oil-demand growth expectations and tight-oil breakeven economics, said Wood MacKenzie Ltd.

Ann-Louise Hittle, WoodMac’s head of macro oils research, 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.”

She believes 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,” Hittle said.

She noted “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.”

OPEC members were well aware that negotiations regarding Iran’s nuclear abilities have been extended, which means 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,” Hittle said. The cartel’s decision to maintain its production ceiling “means oil prices—as has already happened—are under downward pressure to slow the rate of supply growth.”

Previously, WoodMac noted that Brent and US light sweet crude would need to fall for several quarters before triggering “a significant slowdown in US tight oil production growth.”

It said, “With Brent below $75-80/bbl and WTI falling below $65-70/bbl, the market will test the US tight oil price floor, act to slow medium-term oil supply growth beyond the US, and challenge OPEC resilience to hold to its current production levels.”

WoodMac said, “For US tight oil, our detailed breakeven price analysis shows by end-2015, such prices could lead to at least 600,000 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.”

Contact Paula Dittrick at paulad@ogjonline.com.

Paula Dittrick is editor of OGJ’s Unconventional Oil & Gas Report.

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