Daily Management Review

Bank of America: Price war in the oil market is meaningless


09/26/2016


Price wars, led by OPEC and the US to bring down the prices of raw materials on the world market, have lost relevance, said analysts of Bank of America Merrill Lynch. There are too less benefits of increasing production for the cartel.



BofAML’s research concludes that now impact of low prices on oil demand is not as significant as it used to be. According to estimates of the bank’s analysts, if average price remains at $ 50 per barrel over the next 15 years, demand for oil during this period will increase by 11.8 million barrels per day. Average price of $ 65 will raise the bar to 10.2 million barrels. Thus, a difference of $ 15 gives an increase in demand of 1.7 million barrels a day on the horizon in 15 years, or only 110 th. barrels. a day for a year. This means that a significant increase of oil production makes no sense for OPEC, according to the BofAML.

OPEC countries have boosted production up in the past two years, and expanded the world oil market share from 33% to 35%. This, on a par with decline in oil prices, has dramatically reduced oil production in the United States. In particular, in May 2016 number of operating drilling rigs, according to Baker Huges estimates, fell to a record low - 404 units.

BofAML notes that two years of price wars put OPEC in a difficult position. Budgets of state corporations from the oil cartel’s key countries have shrunk by 23% from 2014 to 2016. This, in turn, led to generous flows of money in development of new deposits. As predicted by BofAML, the world supply of oil both from the cartel countries and other exporters will fall sharply in the coming years. According to the investment bank analysts, it will be more profitable for OPEC not to intensify investment in high production levels.

The US investment bank believes that increase in production will not bring tangible benefits to Saudi Arabia (the world leader in oil production according to IEA0. The bank estimates that $ 65 a barrel will bring to Riyadh $ 4.3 trillion with an average production of 12 million barrels a day during 15 years. The price of $ 50 and 18 million barrels of daily production volume will end up with $ 4.9 trillion. Production expenses per barrel are around $ 10-20, so increase in production would have no economic sense.

BofAML report has been released on the eve of the International Energy Forum in Algeria, which started on Monday, 26 September. OPEC members and non-cartel oil exporters are expected to hold talks on oil production freeze in the sidelines of the forum. The meeting of major oil producers will take place on September 28 if the cartel members find a compromise on the issue of internal freezing on September 26. However, it is likely that Saudi Arabia and Iran won’t be able to find a common language.

Riyadh is suggesting that Iran freezes the production at 3.6 million barrels per day, while its counterpart wants to increase the volume to 4.5 million barrels a day to restore its "pre-sanctions" share to 13.6% of the market. Another OPEC member states (except Iran, Libya and Nigeria) are offered to cut production by up to 4%.

source: bloomberg.com






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