FRANKFURT(Neil John,Guest Editor,Topmcxtips): The industry hopes that OPEC will announce its first quota reduction since 2009 during its meeting in Vienna on Thursday. A quota reduction of 1.0 mmb/d would be necessary to restore confidence to the market and help stabilize oil prices, according to Deutsche Bank.
“In fact an examination of oil market fundamentals suggests that a coordinated cut in OPEC production is inevitable,” DB said.
Whenever the Brent 1M-12M time spread has moved into deep contango OPEC production cuts have typically been not too far behind.
“According to OPEC’s market projections as well as our own forecasts, the call on OPEC crude will fall to 29.2 mmb/d in 2015 as a result of strong non-OPEC supply growth. As of last month this compares to OPEC production, including Iraq, of 30.6 mmb/d, which is 0.6mmbd above the current quota agreement.”
Together with a strengthening US dollar and lower economic growth forecasts, we expect this will compel OPEC into action. The uncertainty is whether OPEC can coordinate agreement in time or whether it will only sanction production cuts early in the new year.
Over the past 20 years, an initial quota reduction by OPEC has averaged 1.1 mmb/d. Outside of recessionary environments, OPEC action has been successful in that oil prices have typically rallied by 8.5% over the subsequent three month period. If history repeats itself it would imply Brent moving back to USD87/bbl by February 2015.