Energy Monitor June
Group Economics Hans van Cleef
OPEC ready for second round 3 June 2015 Oil price recovery cooling, short-term downward risks on the rise OPEC preparing for next move in battle for market share Slowdown in Chinese oil demand leading to lower oil price equilibrium
Further oil price recovery on hold
Figure 1: Recovery oil price runs out of steam (USD/bbl)
On 6 May 2015 oil prices reached their highest point since the onset of the recovery in January after the massive price fall last year (Brent USD 69.63/barrel and WTI - USD 62.58/barrel). Oil prices have now again come under downward pressure (Figure 1). The recent stagnation and increased pressure on the oil price is attributable to several factors. Before addressing these, we would emphasise that the fundamentals have changed little since January. There was, and still is, an oversupply situation and this will remain the case in the near future.
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Now for the reasons underlying the recent price pressure. The first factor driving the oil price recovery was the weakening of the US dollar. Recently, the dollar has strengthened again due to Federal Reserve policy expectations combined with increased concerns about Greece.
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A second contributory factor was the building up of speculative long positions, notably by hedge funds. Meanwhile, hedge funds are winding down their speculative positions. The reduced number of long positions has brought the oil price under renewed pressure.
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A final factor for the revived pressure on the oil price is the fact that the increase in production efficiency gains coupled with the higher oil price has made many shale oil operations in the United States profitable again. Whilst output continues to edge lower, oil production in the US is projected to remain around its current record level (Figure 2), the reason being that oil companies have already been able to sell their future oil production at higher prices on the futures market. As a result, it remains profitable for them to continue or resume production. Already drilled but still non-producing oil wells can now also come on stream. This is confirmed by the fact that, after a period of nearly six months, the drop in the number of drilling rigs is appearing to slow and may therefore stabilise.
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OPEC decision looks like formality
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Source: Thomson Reuters
Figure 2: US oil production (x 1000 b/d) versus US oil rigs (right axis) 9.500
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US crude production (x kb/d) Source: Thomson Reuters, Baker Hughes
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OPEC will decide on its production quota on 5 June. Whereas the initial market consensus was that OPEC would cut its quota after all in June, now the market – like ourselves – is counting on OPEC to leave its policy unchanged. This would mean OPEC maintaining its production quota of 30 million barrels per day in an attempt to preserve its market share. Even the spokesmen for Iran now say that OPEC will very probably leave its production unchanged. Prior to the meeting in November 2014, Iran, together with Venezuela, was actually lobbying for a production cut in order to prop up prices. OPEC's strategy report forecasts rising oil production from non-OPEC countries until at least 2017. By keeping up production in a bid to secure market share, OPEC will not assume the role of swing producer.