Arab OPEC pro­duc­ers brace for oil-price weak­ness for rest of 2015

The Pak Banker - - BUSINESS -

A sec­ond oil price rout of 2015 has forced Arab OPEC mem­bers to cut their price ex­pec­ta­tions for this year, show­ing they are pre­pared to tol­er­ate cheaper crude for longer to de­fend mar­ket share and curb ri­vals' out­put.

OPEC del­e­gates, in­clud­ing those from core Gulf OPEC coun­tries, see eco­nomic trou­bles in top energy con­sumer China as short term and un­likely to have much im­pact on de­mand for crude which will rise sea­son­ally in the fourth quar­ter. But they also be­lieve it will take more than just a few months for weak oil prices, which fell to a more than six-year low near $42 on Mon­day, to re­duce sup­plies from higher- cost pro­duc­ers such as U.S. shale and stim­u­late de­mand.

They ex­pect the re­cent price drop will help re­duce the crude over­sup­ply to­wards the end of the year and thus lift oil prices slightly. The com­ments fur­ther in­di­cate that the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries is stick­ing to its pol­icy of de­fend­ing mar­ket share rather than cut­ting pro­duc­tion to shore up prices - re­gard­less of how low they would fall and how long it would take to bal­ance the mar­ket. "It will be bet­ter to leave the mar­ket to cor­rect it­self. I don't think this low price will con­tinue," said a Gulf OPEC del­e­gate who de­clined to be iden­ti­fied.

"Prices will be around $40-$50 a bar­rel un­til the end of the year and hope­fully they will reach $60, as­sum­ing there will be a re­cov­ery in China." A sec­ond Gulf OPEC del­e­gate also ex­pected the oil price to re­main around $40-$50 a bar­rel for the rest of the year. A third Gulf oil source said: "Peo­ple are over-re­act­ing to China. But you can­not un­der­es­ti­mate the sen­ti­ment, that's the prob­lem."

"Oil is bot­tom­ing... and the deeper it goes the more the re­bound will be quicker and the sup­ply re­ac­tion will be even big­ger," the source said, adding prices may dip again to slightly be­low $45 be­fore slowly re­cov­er­ing to around $60 by De­cem­ber when OPEC meets next. Arab OPEC del­e­gates ini­tially thought prices would re­cover more quickly af­ter the group's shift to the mar­ket-share strat­egy in 2014 deep­ened the de­cline, say­ing last De­cem­ber they saw oil be­tween $70 and $80 by the end of 2015.

Other OPEC del­e­gates out­side the Gulf are also brac­ing for a pro­longed pe­riod of low prices as they do not ex­pect the group's top pro­ducer Saudi Ara­bia, the driv­ing force be­hind OPEC's re­fusal to cut out­put, to change course and prop up prices. "If this over­sup­ply con­tin­ues with no ac­tion from OPEC or Saudi Ara­bia, then I ex­pect prices will stay around $45 un­til the end of the year," said one.

As a pol­icy, OPEC has not openly tar­geted spe­cific oil prices for over a decade, ever since it aban­doned a $22 to $28 price band in­sti­tuted af­ter a price crash in the late 1990s. But the com­ments sig­nal how big pro­duc­ers see the mar­ket play­ing out and that OPEC's strat­egy cham­pi­oned by Saudi Ara­bia is not a short-term one, but rather a plan that needs time to work and they are will­ing to wait. Gulf oil in­sid­ers see no sign of Saudi Ara­bia wa­ver­ing on its long-term strat­egy. "This is not go­ing to be two-three quar­ters' ad­just­ments, this is go­ing to be a two-three years' ad­just­ments," said Yasser El­guindi of eco­nomic con­sul­tants Med­ley Global Ad­vi­sors.

OPEC re­con­firmed the mar­ket-share strat­egy at its last meet­ing in June and the Gulf OPEC del­e­gates were still ex­pect­ing a re­cov­ery in prices to­wards the end of 2015, sup­ported by higher global de­mand. But those sen­ti­ments have changed with the latest un­ex­pected price drop, grow­ing con­cern about the de­mand out­look in China and per­sis­tent over­sup­ply.

OPEC's own fore­casts show the group ini­tially over es­ti­mated the speed at which low prices would curb non-OPEC sup­ply. This, plus record-high out­put from Saudi Ara­bia and Iraq, point to an over­sup­ply of more than 2 mil­lion bar­rels per day (bpd).

A big un­cer­tainty in 2016 is the ex­tent to which Iran boosts pro­duc­tion if and when sanc­tions are lifted. Iran's in­sis­tence that it will take back more than 1 mil­lion bpd of mar­ket share has wor­ried the Gulf mem­bers. Still, even OPEC mem­bers who are less wealthy than Gulf Arab pro­duc­ers and want higher prices agree the latest drop would mean less over­sup­ply in com­ing months, po­ten­tially sup­port­ing prices in the last quar­ter of the year.

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