© Abhishek Deshpande
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There is an almost equal probability that The Organization of the Petroleum Exporting Countries is not going to cut versus its scaling back production. We suppose that the possibility of scaling back production is slightly higher. This happens mainly, due to lower oil prices that are putting a lot of pressure on weak OPEC countries such as Venezuela, Libya, Algeria and even Iraq, which voiced concerns on poor oil prices. Some of the OPEC producers have also categorically stated that they will look at discussing oil production cuts. However, if OPEC does not cut production, Brent would come under further pressure, possibly falling closer to USD 70 bbl/d, if not lower.
OPEC nations will meet on November 27 in Vienna and may decide to reduce production in order to boost oil prices, since many of the member countries require a price above $75 per barrel to balance their budgets. In your opinion, is there a high chance of prices to get lower and will it be an effective step?
At the current moment market is weak from the fundamental point of view. Supply growth is outpacing demand growth by over 500,000 b/d currently, bringing call-on-OPEC close to 29.4m b/d in 2014 and 29.2m b/d in 2015. OPEC is currently producing over 30.2mn b/d, which is almost 1mn b/d above the required oil in the market. If OPEC does not cut its production, oil will fall further. However, in case OPEC announces meaningful production cuts of 0.8m -1m b/d, then we can see markets balancing once again, whereas the oil prices will be supported. However, this will very much depend on the OPEC adhering to the cuts, which they about to announce.
What other factors might influence oil prices performance in the nearest future?
Although geopolitical risks in the MENA region continue to impact oil supplies, such as the outages in Elsharara and Elfeel fields in Libya, the excess oil has almost dampened any geopolitical risk premium for now. Any risks around Russia cannot be ignored either, however, all these risks have to impact oil supplies in the region of 800,000 b/d to see any spike in oil prices in the near term. The deal between Kurds and Iraq could release more oil into the markets, making fundamental data weaken further. Moreover, increased US oil production will put additional pressure on oil prices in the future as well.
What is your forecast for oil prices at the beginning of 2015?
We expect Brent crude to reach the average $84/bbl in the first quarter of 2015 and we can see it at $91/bbl for the year as a whole.