OPEC meeting: expectations and further prices perspectives

OPEC meeting: expectations and further prices perspectives

Baku, Azerbaijan, Nov. 26

By Aygun Badalova - Trend:

Oil prices on the world markets continue to fall on the threshold of OPEC meeting and after the failure of four oil producing countries to reach an agreement over the output cut.

West Texas Intermediate (WTI) for January delivery dropped by 2.3 percent to $74.07 per barrel, while Brent, which is the benchmark price for products in Europe and Asia, downed by $1.58 to $78.4 per barrel.

Yesterday the representatives of Saudi Arabia, Russia, Mexico and Venezuela held four-way talks in Vienna, where they agreed to coordinate their actions on the oil markets and to meet once again after three months. However, they failed to reach a general agreement on the cut of output.

Analysts are very sceptic about the possibilities for OPEC members to reach such kind of agreement on the meeting which will be held on November 27.

"OPEC is unlikely to cut its output target by a meaningful amount at its next meeting," analysts of the British economic research and consulting company Capital Economics believe.

"The next meeting of OPEC should be the most interesting since the change from individual quotas to a group target in early 2012," analysts said in a report, obtained by Trend.

"The recent drop in prices has prompted the question of how OPEC might respond. OPEC is, of course, a very diverse group. Some members, notably Venezuela and Iran, would probably be happy to sell as much of their oil as possible at any price. But the rest, led by Saudi Arabia and the other wealthy Gulf Cooperation Council countries, can afford to take a longer view," the report said.

Analysts also believe that the richer members of the cartel may even see a period of lower oil prices as potentially working in their favour over the longer term, given the boost it should provide to the global economy and hence to demand.

Capital Economics' analysts believe that even if the cartel did decide it was in its interests to cut output, cohesion within the group is much weaker than it has been previously. Moreover, compliance with the OPEC target is likely to remain poor, they said.

Indeed, the cartel is currently producing around 31 million barrels per day, compared to its target of 30 million barrels per day.

"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. In addition, it is not clear that there is a mechanism that OPEC can use to cut oil production, given the lack of agreement amongst members of the cartel," analysts said.

"The upshot is that OPEC's output target appears to act as a floor on production rather than a ceiling," analysts added.

As a result, British analysts believe that OPEC will not be able to prevent the price of a barrel of Brent from falling to $70 by the end of 2016.

Analysts from US JP Morgan bank believe that barring some unexpected development in production that could come from Russian or Mexican participation in a broader production restriction arrangement, OPEC will need to cut output.

Inaction by OPEC would require an adjustment by non-OPEC producers - something that would likely require prices to move materially lower, according to the analysts.

"Given their potentially different objectives and the contrasting statements from OPEC member countries, we remain concerned that member countries will be unable to reach an agreement on how to implement these adjustments to supply," analysts said.

Overall, analysts believe that 2015 is set to be the third consecutive year that oil demand growth is eclipsed by strong non-OPEC supply growth, and at the same time volumes required from OPEC to balance the market are expected to decline.

"These factors, in combination with uncertainty over the outcome of OPEC's meeting on November 27, underpin a 2015 Brent price forecast of $82 a barrel, alongside a 2016 forecast of $87.75 a barrel," analysts said.

WTI average price is forecast at $77.25 a barrel in 2015 and $80.75 a barrel in 2016.

You can follow the author on Twitter via @AygunBadalova

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