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Our core view (60% probability) is that OPEC will agree on an output cut (circa 500,000bpd) at their November 27 meeting. This will help temporarily stabilise oil prices and we expect Brent to trade in the USD80-90/bbl range over Q414-Q115. If no cut is agreed, this would trigger further declines in oil prices in the coming months and Brent could hit USD60/bbl in early 2015. Either way, we expect that more significant OPEC cuts in 2015 will eventually provide some support to prices. OPEC price support will be able to slow, but not reverse a multi-year downtrend in oil prices. We forecast Brent to average USD91/bbl in 2015, steadily declining to an average of USD87/bbl in 2017.
Decline To USD60/bbl Is Feasible, But Not Sustainable
Front-Month Brent Crude, USD/bbl (monthly)
Source: BMI, Bloomberg
The table below shows our assessment of how individual OPEC member states are likely to position in the cartel's upcoming meeting. This is based on an evaluation of statements made so far, the stress on their economies from lower oil prices and the current state of their production capacity. As it stands, going by market share it shows a near even split down the middle in positions. In our view, this means that an agreement will have to be based on a consensus and is therefore unlikely to be an aggressive cut.
OPEC MEMBERS - OIL PRODUCTION AND BMI ASSESSMENT OF STANCE GOING INTO NOVEMBER 27 MEETING[td]BMI View: Willing to hold out | OPEC Share (Oct 2014) | Fiscal Breakeven Oil Price, USD/bbl | Production % Y-o-Y chg | Production % chg vs. 2010 average | BMI View: Willing To Coordinate A Cut | OPEC Share (Oct 2014) | Fiscal Breakeven Oil Price, USD/bbl | Production % Y-o-Y chg | Production % chg vs. 2010 average |
Saudi Arabia | 31.7% | 89 | -2.4% | 16.20% | Iran | 9.1% | 136 | 3.4% | -26.0% |
UAE | 9.2% | 81 | -0.5% | 20.30% | Venezuela | 7.7% | 117 | -1.1% | -0.4% |
Kuwait | 9.2% | 52 | -2.1% | 20.60% | Nigeria | 6.3% | 124 | -0.5% | -7.7% |
| Angola | 5.5% | 94 | -4.4% | -7.0% | |||||
| Algeria | 3.8% | 107 | -0.9% | -7.1% | |||||
| Libya | 2.8% | 106 | 78.0% | -46.0% | |||||
| Qatar | 2.3% | 59 | -3.3% | -10.5% | |||||
| Ecuador | 1.8% | 122 | 3.7% | 13.1% | |||||
Total Production Share | 50.1% | 39.3% | |||||||
| Note: Iraq is not included as the country currently operates outside of the OPEC quota system. Source: OPEC, IMF, Reuters, BMI | |||||||||
Modest OPEC Cut To Temporarily Stabilise Oil Prices (60% probability)
Our core view is that OPEC will agree on a modest output cut (circa 500,000bpd) at their November 27 meeting.
Saudi Arabia will be unwilling to shoulder the burden of cutting output and thus a coordinated cut will be required.
We believe there is not yet enough unity of interests among OPEC members to result in a more decisive outcome. Any agreement is likely to be at least partially undermined by a lack of quota discipline.
Crucially, Saudi Arabia has sufficient financial reserves to wait out a multi-month period of lower prices in order to bring non-compliant OPEC members in line with the Kingdom's desire for a significant coordinated output cut.
In our assessment, there is no consensus amongst market participants as to whether OPEC will agree to cuts. Therefore, a modest cut will help stabilise prices and we forecast Brent to trade in the USD80-90/bbl range over Q114-Q115.
Spending Commitments To Eventually Force Cooperation
OPEC Members - 2013 Fiscal Breakeven Costs, USD/bbl
Note: 2015 averages are BMI forecasts. Source: OPEC, IMF, Reuters, BMI
Failure To Cut Would Send Brent Significantly Lower (40% probability)
A failure by OPEC to announce output cuts following the November 27 meeting would send oil prices significantly lower and could see Brent trade as low as USD60/bbl in early 2015.
Net speculative positioning on the ICE exchange suggests that there is still room for significant additional short positions on Brent futures before sentiment reaches a bearish extreme.
Should OPEC not announce production cuts following the November 27 meeting, we will be forced to revise down our current price forecasts for 2015, which already are USD6/bbl below consensus.
OPEC Can Only Temporarily Reverse Surplus Conditions
Global Crude Oil Market Balance, mnbpd (Quarterly)
Source: International Energy Agency (Latest data available is for Q214)
2015 OPEC Cuts To Manage Multi-Year Oil Price Decline
Under either scenario, we expect further cuts to OPEC production in 2015. This will ensure that any decline by Brent below USD70/bbl is temporary.
A prolonged period of oil prices below USD80/bbl would expedite a significant coordinated OPEC output cut, whereby Saudi is not relied upon to shoulder the burden. As the accompanying chart illustrates, elevated fiscal breakeven costs for most OPEC members will eventually help bring 'hold outs' in line with Saudi objectives.
OPEC production cuts will help manage, but not reverse a multi-year decline in oil prices. We forecast Brent to average USD91/bbl, USD88/bbl and USD87/bbl in 2015, 2016 and 2017, respectively. Although lower oil prices will slow the boom in US unconventional oil production, the US will continue to reduce crude oil imports in the coming quarters. This will prevent OPEC cuts from shifting the global oil market back into persistent deficits.
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