Oil hits 4-year low ahead of OPEC meetingToday’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) is unlikely to reach a convincing agreement to cut production, in my view. In October the group pumped 30.974mn barrels a day (b/d), according to Bloomberg estimates. This is already almost 1mn b/d over their self-imposed quota of 30mn b/d. Saudi Arabia increased its output during October by 100k b/d and cut its prices for Asian delivery for the fourth month in a row even as the OPEC reference price fell 13% during the month. In order for OPEC to cut its overall output even just back to its quota, Saudi Arabia would have to resume its historical role as the swing producer and cut its output dramatically. Its recent behavior though has been quite the opposite. It seems intent on driving prices down, perhaps to force expensive US shale oil producers out of the market and to punish the Russians, who are supporting the Assad regime in Syria. I expect oil prices to fall further There is already a surplus of some 600k b/d in the world oil market. Demand for oil usually falls by around 900k b/d in Q1 because of seasonal patterns. Thus OPEC would have to cut production by around 1.5mn b/d just to balance supply and demand at current prices. Moreover, with Europe stagnating and growth in China slowing, the relatively strong growth in the US is not enough to boost overall demand as US energy usage has been falling even while domestic production has been increasing. On top of which, the strong dollar increases the price of oil for consumers outside the US and further dampens demand. Eventually, OPEC will have to cut production, but it may take more pain to get to that point. OPEC’s own forecast envisions demand for OPEC oil of only 29.2mn b/d during 2015 as non-OPEC producers pump more oil. This means the group will have to cut some 1.8mn b/d eventually or see prices fall further. The group has in the past been able to impose discipline when it was absolutely necessary. Most OPEC countries need oil above 100 dlrs/b in order to balance their budget, so eventually prices should force them to the negotiating table. Furthermore, the production cuts would probably fall mostly on those producers that can best afford it – Saudi Arabia, Kuwait and the UAE. However, it is my view that Saudi Arabia probably wants to see the price fall further for its own strategic reasons and therefore it is far too early to see a market-affecting compromise. The best that the group can hope for at today’s meeting is probably a reaffirmation of its current quota, but unless it can convince the market that it is going to cut back production to that level and stick to it, the news is not likely to boost prices significantly. Cheaper oil is a boon to many countries In the US, families with income below USD 50,000 a year spend an average of 21% of their income on energy. Every 10 cent drop in the price of gasoline translates to annual savings of some USD 120 for them. Thus lower oil prices should help consumption in the US and in other oil-consuming countries. European consumers may not benefit as much, because taxes account for at least half of retail gasoline prices and thus the retail price is not as closely tied to the wholesale price of oil. Many EM countries that import oil, such as Turkey, Thailand, Korea, South Africa and Poland will also be beneficiaries. Of course the currencies of oil-producing countries, CAD and NOK in particular, are likely to suffer, as may RUB and MXN. The schedule: The OPEC meeting starts at 0900 GMT and the press conference to announce the results begins at 1500 GMT. Yesterday’s market: US data yesterday generally disappointed, with durable goods unexpectedly dropping in October, personal income and spending both missing estimates, Chicago PMI below estimates (although still quite high on an absolute basis), final U of M consumer confidence index for November revised down, and initial jobless claims exceeding forecasts. Fed funds rate expectations fell again, the ninth decline in 10 days. So it was only natural that the dollar would decline against most of its peers. The only exception was NOK, which depreciated after the country’s AKU unemployment rate for September failed to decline as the official unemployment figure had done for the same month. Lower oil prices may also be holding NOK back; CAD, the other major energy currency, was the next weakest unit (although it did gain marginally vs USD). Today’s (other) events: With the US on holiday today (Thanksgiving), USD weakness may continue in the absence of any USD-positive news coming out. The key event today will probably be ECB President Draghi’s speech in Finland. However, he has spoken several times recently and surprised the market with his dovishness already. It’s hard to imagine that he has anything left to reveal. ECB Governing Council member Jens Weidmann also speaks in Germany; it will be interesting to contrast his comments with Draghi’s. The main release during the European day will be the German CPI for November. As usual, several of the Lander release their figures before the national figure is released. We would look at the larger ones for guidance on where the headline figure is likely to come in at. The consensus is for a softer figure than last month, which could push down estimates for Eurozone CPI to be released on Friday. Also, the German unemployment rate for November is expected to remain unchanged from October. Eurozone’s M3 money supply is forecast to have risen 2.6% yoy in October, a slight acceleration from 2.5% yoy in September. This would push the 3-month moving average higher, although the ECB is putting little significance on money supply nowadays. The bloc’s final consumer confidence for November is expected to remain unchanged from the preliminary print. In Canada, current account deficit for Q3 is forecast to remain more or less at the same levels as in Q2. The markets are closed in the US due to the Thanksgiving holiday. In New Zealand, building permits for October are coming out.
Posted on: Thu, 27 Nov 2014 12:11:30 +0000
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