Giovanni Staunovo, Commodity Analyst at UBS AG, on oil

Note: This section contains information in English only.
Source: Dukascopy Bank SA
© Giovanni Staunovo
Oil dipped on Monday as traders remained cautious ahead of the OPEC meeting later this week and as the widely expected U.S. interest rate hike strengthened the Dollar. While most analysts do not expect OPEC to cut production at the important policy meeting on Dec.4, they are mindful that Saudi Arabia could be inching towards the idea of working on price support measures with other oil producers. What is your outlook on that issue? And what actions do you expect from OPEC during the upcoming meeting?

It's doubtful that OPEC or Saudi Arabia will change their stance. Saudi Arabia's oil minister Al-Naimi said that they are willing to adjust their output only if other (non-OPEC) participants do so as well. But our understanding is that non-OPEC producers, such as Russia or Mexico, are unwilling to reduce current production levels. Thus, it is unlikely, in our view, that they will find an agreement on this subject at the December meeting. Instead, we expect OPEC will continue to focus on maximizing volume. If anything, they may raise OPEC‘s production quota to reflect Indonesia's readmission into the group.

Some analysts believe the OPEC meeting should also include discussions about new supply from Iran. Iran hopes to raise its crude exports by as much as 1 million barrels per day within months of the easing of sanctions aimed at its nuclear programme. The country unveiled an upgraded oil contract last week as part of a broader effort to attract Western investors. How do you think, will it be possible for Iran to raise its crude exports? And if yes, how this will impact the performance of oil in the future?

If nuclear sanctions on Iran are lifted, we believe the country can increase its production and exports by around half a million barrels over the course of 2016. The big question for us remains how fast and when exactly will these flows come into the market, which would determine price performance. We expect the larger part of the increase will come in the second half of next year. This should not weigh on prices because oil demand is still expanding while non-OPEC output is contracting. Hence, we foresee higher demand for oil from OPEC in 2H16.

What other factors and events will determine oil performance and where do you foresee oil prices for the end of this year?

The most influential factor on the demand side is the situation in emerging Asia, especially China. China's oil demand, if it will stay resilient or not, will depend on the country experiencing a hard landing – a risk case for us – which would delay our expectations for an oil price recovery.  On the supply side (non-OPEC) the focus remains on oil production in the US. We are closely tracking how fast US production is rolling over.With OPEC, the question is how fast Iran will return to the market.

In general, we anticipate oil prices to persist at current depressed levels in the near term; the oil market remains oversupplied and needs to work off excess supply. Current prices are low enough to ensure the rebalancing process continues, in our view. Hence, our three-month forecasts remain unchanged, with a sideways stance and potential lows at USD 40/bbl for Brent. With oil demand expected to increase by 1.1-1.2mbpd and non-OPEC supply contracting by at least 0.3mbpd next year, the oil market should be almost balanced by 2H16, in our view. As market participants realize this, with room for a deficit at the end of 2016 and in 2017, we expect Brent oil prices to rise from current levels to USD 55/bbl in six months and USD 63/bbl in 12 months

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