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OPEC to fail preventing oil prices from falling to $70

19 November 2014 17:49 (UTC+04:00)
OPEC to fail preventing oil prices from falling to $70

By Aygun Badalova

OPEC is unlikely to cut its output target by a meaningful amount at its next meeting, but even if it does, actual production may not fall at all, analysts of of the British economic research and consulting company Capital Economics believe.

“The recent sharp fall in oil prices has increased speculation that the cartel will cut its output target in an effort to boost prices. However, most comments from OPEC ministers seem sanguine and it is not clear that even if they did cut their production target, actual output would fall,” analysts said in a report obtained by Trend.

Moreover, analysts believe that any cut in the cartel’s output target will simply be a response to lower demand for the group’s oil, rather than a serious attempt to drive up prices.

Among the reasons why Capital Economics’ analysts believe that OPEC will be relatively sanguine about the fall in oil prices is that cartel may not think that the recent sharp fall in prices will be sustained over the long term.

Even though the current oil price is below the price needed to balance the government budget for many OPEC members, key Gulf countries are in a much better position, according to the report.

“Most of the Gulf States have accumulated vast assets, especially Saudi Arabia, which would allow them to run budget deficits for years if it was necessary,” analysts said.
Analysts also believe that compliance with the OPEC target is likely to remain poor. Indeed, the cartel is currently producing around 31 million barrels per day, compared to its target of 30 million bpd.

“While it may be in the interests of the group as a whole to cap output and support prices, each individual member has an obvious incentive to sell as much oil as possible,” analysts said.

Analysts also said that, despite the recent fall in prices, non-OPEC supply is likely to continue to increase. Already, only one of the world’s top five oil producers is an OPEC member, the report stressed.

A further surge in non-OPEC supply, analysts believe, would continue to erode the cartel’s control of global supplies and prices.

“Any cut in OPECs production over the next year is only likely to exacerbate this process by keeping prices higher than they otherwise might have been and encouraging the development of alternative sources of supply,” analysts said.

Overall, analysts do not expect the cartel to be able to prevent the price of a barrel of Brent from falling to $70 per barrel by the end of 2016, even if this is below OPEC’s current comfort zone.

Analysts predict average price both for Brent and WTI at $75 per barrel in 2015 and $70 per barrel in 2016.

On Monday West Texas Intermediate (WTI) for December delivery dropped by $0.9 to $74.96 a barrel in electronic trading on the New York Mercantile Exchange.

January Brent, which is the benchmark price for products in Europe and Asia, downed by $0.9 to $78.57 a barrel on the London-based ICE Futures Europe exchange.

OPEC member states will hold a meeting on November 27, where they will make a decision on production quotas.

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