Anxiety over Opec meeting weighs on oil price

Expectations for next month’s Opec ministerial meeting now weigh heavily on the oil market after the sharpest sell-off in years over the past month, analysts said.

The declines continued on Thursday, leaving benchmark Brent crude futures down 72 cents late in the UAE day at US$83.06, the lowest price in four years. In New York, West Texas Intermediate futures were off $1.36 at $80.42, while on the Dubai Mercantile Exchange the Oman crude contract closed down 98 cents at $82.76. The losses since the midsummer high, when Brent was above $115 a barrel, are now approaching 30 per cent.

A wide range of banks have now lowered their oil price forecasts, a move that should be seen more as recognition of the reality that has set in. The new price ranges from banks such as Barclays, Macquarie, Deutsche Bank, ANZ and Société Générale still vary widely – from low $80s to nearly $100 for the rest of this year, and from low $80s to well above $100 for next year – but there was some level of consensus about the main issues facing the market.

In the near term, the scheduled meeting of Opec’s oil ministers on November 27 now looms large. Even though analysts differ on whether Opec even has the power to influence the market, the very fact that it has been given such importance now means that an agreement to cut production – or a lack thereof – will set the tone for the market for the rest of this year.

As ever, Saudi Arabia’s is the most important voice and comments by the oil minister, Ali Al Naimi, in recent weeks have been taken by many to mean the Saudis are prepared to accept oil prices down near $80 a barrel for some time.

“My interpretation is that this is a negotiating position,” said Peter Stewart, the chief energy analyst at Interfax Energy Services. “Saudi wants to be in a position where if it cuts production then it wants to make sure the pain is shared by other Opec members. It is going to be a very interesting meeting, but what the Saudis absolutely do not want is that they cut and then prices stay at $80 and they get a double-whammy – lower production and lower prices.”

Another point of agreement is that the world economy and energy demand growth are the single-most important factors for the medium term. This was evident in the huge oil futures sell-off that followed the report earlier this week from the International Energy Agency in which it lowered its forecast oil demand for this year and next. Though the move was entirely predictable given that the IMF and others had already downgraded their forecasts for global economic growth, the IEA report seemed to jolt the oil market, perhaps because it also reported that Opec crude production had surged to a 13-month high last month, mainly because of extra output from Libya.

“There are a lot of fears about the macroeconomy, and even though the physical oil market looks better, this is a macro move,” said Amrita Sen, an oil analyst at Energy Aspects, a research company. “Longer-term, non-Opec supply will be impacted – there are a lot of expensive projects out there. But that won’t save us near term.”

Whether oil prices at the new lower levels will curb some of the more expensive oil producers remains an open question.

Last week the Energy Information Agency in the United States reported that total US crude oil production averaged 8.7 million barrels per day in September, the highest monthly production since July 1986. Last year, production averaged 7.4 million bpd and it is expected to average 9.5 million bpd next year, which would be the highest since 1970.

Much of that is shale oil, and analysts have speculated that Saudi Arabia is hoping lower oil prices will discourage some of the investment in that sector. According to Mr Stewart, break-even oil prices for shale oil projects vary widely, from about $80 a barrel to as low as $40.

Nevertheless, Michael Lewis, the chief commodities strategist at Deutsche Bank, said that lower US shale (or “tight”) oil production offers some hope to Opec if it has the patience.

“In the event of a failure of Opec to respond promptly to oil price declines, we note that 9 per cent of 2015 US tight oil production would become uneconomic at $90 [a barrel for Brent] and 39 per cent at $80,” he said.

amcauley@thenational.ae

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