Daily Management Review

Macquarie’s Oil Research Chief Predicts That OPEC Agreement Will Collapse Next Year


06/22/2017




Macquarie’s Oil Research Chief Predicts That OPEC Agreement Will Collapse Next Year
The head of European oil and gas research at Macquarie has warned that beyond February 2018, the OPEC-led production cut agreement that was extended last month is unlikely to survive that date.
 
Ian Reid told during a TV interview on Thursday that the key question was whether they could extend this agreement once again into 2019, while noting that members of the oil cartel were a "disparate bunch".
 
"I think that's going to be a very hard ask to be honest. We actually see this OPEC agreement breaking up towards the middle of next year. In that case, we're going to see a huge amount of extra oil on the market next year," Reid warned.
 
He added that a readily identifiable cause can be attributed to the inability of OPEC's efforts to bolster the oil price.
 
"It's the volume of shale. It has risen quicker and more sustainably than most people were expecting even a few months ago…that knocks out pretty much all of what OPEC can do," said the sector specialist. And with the bank not expecting much of a recovery in 2019, Macquarie's price estimate has dropped to below $50 for the first time in a while, he revealed.
 
Given that ever more shale producers are enticed into the market as the oil price rises, it's a zero sum game, asserted Reid, and identified this to be the key problem for the Saudis and other producers.
 
"They (OPEC producers) can't get the price up to a level where they can keep the shale guys out of the game so unfortunately they're just chasing their tail at the moment," he concluded.
 
The competition from the latter is now more formidable than before, said Ewen Cameron Watt, senior director at BlackRock, while agreeing that the swing producer is no longer OPEC but shale drillers.
 
"They have managed to raise a lot more capital in the last 12-18 months so they can sweat this out for a bit longer," he explained.
 
With WTI trading up 0.56 percent to $42.76 by 1:00 p.m. London time and Brent 0.78 percent higher at $45.17, beaten down oil prices caught a break in Thursday trading after a weak start to the session.
 
Yet, rather than push it down extensively, traders have been trying to price the asset, surmised Cameron Watt, while considering the recent trading patterns.
 
"My sense is that we're probably in one of those $40 - $50 or $45-$55 ranging areas rather than we're looking at something going down into the mid-$30s," he said, adding "if that was wrong, there'd have to be a chronic increase in supply at a point of a very low price."
 
Beat Wittmann, partner at Porta Advisors, said that oil's weak recent trajectory and outlook is not incompatible with an optimistic view on stocks with respect to broader market implications.
 
"Net-net lower prices are positive for G-7 countries and certainly for emerging markets where it's an important input factor…It takes off some pressure, of course, from interest rates and inflation rates as well, so I don't see that as negative as long as we don't go really much lower," said Wittmann.
 
"Low oil prices - as long as we have orderly markets - is quite positive," he concluded.
 
(Source:www.cnbc.com) 






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