Contrarian urges Opec to end cuts
Commerzbank AG’s head of commodities research never believed output reductions would work
When Opec and its allies unveiled their plan last year to rebalance world oil markets, prices rallied and most analysts expected the supply cuts would succeed. With the strategy now faltering, one bank that predicted failure says the group should call it quits.
There’s been a wave of price-forecast downgrades over the past month as analysts from Goldman Sachs Group to Bank of America Corp and Citigroup acknowledged that Opec’s production curbs haven’t cleared a global glut. One forecaster who’s kept his outlook unchanged is Commerzbank AG’s Frankfurt-based head of commodities research Eugen Weinberg, who never believed the cuts would work in the first place. “Opec’s strategy was doomed from the very beginning,” Weinberg said. “It’s all about shale and the sooner they recognise that the better.”
Last December, when most banks were projecting the group’s intervention would send oil rallying toward $60 (Dh220) a barrel or higher by the end of 2017, Commerzbank anticipated a slide below $50. Opec’s curbs “will result in a more rapid increase in US oil production,” Weinberg wrote on December 8. American output has since reached a near-two-year high and is on track to hit a record.
The bank’s bearish outlook has proved accurate. Weinberg predicted in December that Brent would average $50 a barrel in the second quarter, just 79 cents away from its actual value in the period. He sees the grade averaging $48 in the fourth quarter.
Now, Commerzbank believes the Organisation of Petroleum Exporting Countries should abandon the output curbs entirely and revert to its previous policy of maximising production to squeeze rivals out of the market. “They should let prices crash to kill shale and then aim for steady price increases in the long term,” Weinberg said.
Other forecasters, while recognising that Opec’s policy hasn’t worked out as planned, say the group should persevere.
Goldman Sachs said the organisation should double down, quietly making deeper production cuts in order to accelerate the depletion of inventories. Failing to deliver this “shock and awe” to markets could send prices below $40 a barrel, analysts Damien Courvalin and Jeffrey Currie said in a report on July 10.