The sell-side is worried...
SocGen's head of oil research Mike Wittner warns "this will reverberate for years"... (via Bloomberg)
OPEC decision to keep output target is "unambiguously bearish,"
"We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC"
"It's huge,” he says by phone from New York. “This is a signal that they’re throwing in the towel. The markets have changed for many years to come"
"The change is that it's no longer Saudi Arabia and OPEC that are going to be managing the supply side of the market. It doesn’t sound like much, but that is so fundamental, it is hard to overstate”: Wittner by phone
"This will reverberate for years," adding, it will "bring on lower prices and let the market do the job of throttling U.S. shale oil growth"
U.S. shale output unlikely to contract for 1-2 yrs amid lower prices
Goldman warns another large leg lower in Brent oil prices to near $60/bbl would not be sustainable beyond a few months (absent significant demand weakness) as it would accelerate the rebalancing of the oil market with Canadian oil sands and US shale oil projects reaching their production variable costs
The call on OPEC becomes the call on US shale
Today, November 27, OPEC announced that it would maintain its production target at its level of 30 million barrels per day. The organization further commented that it would aim to adhere strictly to this quota, although past quotas have only been loosely implemented. Today’s decision came in line with our expectation and our view that it is not in OPEC’s interest to balance the market on its own but that US shale oil production should contribute as well, given its scalability. Further, today’s decision comforts us in our forecast for a large market surplus in 1H15.
Potential for further price declines until evidence of a US production growth slowdown...
While we continue to believe that WTI prices in a $70-$75/bbl range are sufficient to incentivize US producers to reduce capex, today’s price sell-off creates potential for further declines in oil prices. In particular, now that OPEC is aiming to maintain production and market share, prices could trade lower until evidence of a pull-back from US E&Ps, when they announce their 2015 capex guidance in January-February (and despite our expectation for an only modest build in 4Q14 inventories). The next OPEC meeting is scheduled for June 5.
...although prices at current levels likely lead to a balanced market by 2H15
Ultimately, we expect US production growth will slow and that OPEC will implement moderate production cuts once this slowdown is apparent. Consequently, we reiterate our 2015 price forecast with Brent prices at $80-$85/bbl and WTI at $70-75/bbl. Importantly, we do not believe that it is in OPEC’s interest to push prices significantly and sustainably lower, and we forecast lower OPEC production starting from 2Q15, as the fiscal strain on non core-OPEC countries would be too large otherwise. Further, we believe another large leg lower in Brent oil prices to near $60/bbl would not be sustainable beyond a few months (absent significant demand weakness) as it would accelerate the rebalancing of the oil market with Canadian oil sands and US shale oil projects reaching their production variable costs.
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