OPEC meeting disappoints
The OPEC has decided to maintain its current level of production, which should weigh on prices over the short term.
It’s been a year since oil prices started to fall following the OPEC decision not to limit its production. After its last meeting the OPEC decided to maintain its current level of production. Short term this decision should weight on the prices. Longer term we expect an increase in demand and a reduction of the production, with some producers that can’t take any more losses, which should drive prices back up.
The situation before the OPEC meeting
The Organization of Petroleum Exporting Countries sent crude prices reeling a year ago when it decided to maintain output, continuing to pump into an oversupplied market as it sought to force higher-cost producers to scale back their operations. Saudi Arabia, the group’s biggest producer and architect of this policy, has remained opposed to a cut in production as long as big producers outside the group like Russia and Mexico do not cooperate.
The situation before the OPEC meeting
The Organization of Petroleum Exporting Countries sent crude prices reeling a year ago when it decided to maintain output, continuing to pump into an oversupplied market as it sought to force higher-cost producers to scale back their operations. Saudi Arabia, the group’s biggest producer and architect of this policy, has remained opposed to a cut in production as long as big producers outside the group like Russia and Mexico do not cooperate.
The market reactions
Oil prices declined 3,5% on the news, the WTI ending the day at 40.2 $/b and the Brent at 43.3 $/b. The OPEC meeting outcome does not change anything to the present situation. The crude market remains oversupplied by as much as 2 million barrels a day on a total estimated production of 95 million barrels a day.
We cannot exclude to see oil prices temporarily at lower levels as global oil stockpiles have risen to record levels. But we expect that US shale oil producers will continue to reduce their output as at these price levels they are not only losing money but are now cash flow negative. As the global demand is anticipated to expand by 1.3 mb/d in 2016, we stick for the coming year to our trading range forecast of 45-55 $/b for the WTI and 50-60 $/b for the Brent.