Supply-driven oil decline demands a response from OPEC – Deutsche Bank

FXStreet (Delhi) – Michael Hsueh, Research Analyst at Deutsche Bank, notes that there is a clear distinction between the oil-price declines of 2008-09 and 2014-15 in that a disappointment in demand was almost entirely responsible in the first case, while in the current episode, supply strength has been the primary driver.

Key Quotes

“In the current episode of low prices, we see the exploitation of US tight oil reservoirs of low permeability and low porosity as the primary driver, with OPEC inaction as a major contributor. US production growth in 2012 and 2013 averaged 1.1 mmb/d, a tripling from the 2009-2011 rate, and satisfied 95% of world demand growth on its own in these two years.”

“In 2014, US production growth surged further to 1.7 mmb/d, beating the start-of-year forecast of 1.0 mmb/d. Production from non-OPEC Middle East, Europe, and Asia stemmed declines seen in preceding years, while Brazil jumped by 230 kb/d. In total, non-OPEC supply grew at 2.4 mmb/d in 2014, or triple the rate of world oil demand growth in 2014.”

“In contrast to 2008 and 2009 when oil demand fell for two consecutive years, world oil demand still grew in 2014 at 811 kb/d yoy, although less than the trend since 1987 (1.1 mmb/d) and less than originally forecast at the start of the year (1.25 mmb/d).”

“OPEC is playing a pivotal role in the extent and duration of the decline since 2014. For all the talk of its irrelevance, the cartel still controls 40% of the world’s oil supply. Since its November 2014 meeting when it agreed to hold its quota unchanged, 2015 OPEC production is up by 950 kb/d over the 2014 level, equaling 70% of the 2015 estimated oversupply.”

“Thus, closer parallels can be drawn between today’s decline and the increase in production from core OPEC members in 1985-86 in response to rising production from the North Sea, Mexico, and other non-OPEC producers since 1979.”

“We expect the oil price recovery to proceed at a measured pace, with significant oversupply continuing through H1-16. Moreover, every previous recovery in oil prices since 1986 has been accompanied by an OPEC quota reduction of at least 1.1 mmb/d and as much as 4.8 mmb/d. In this instance we expect no OPEC action and thus the recovery will depend on the relatively slower response of non-OPEC supply and global consumer demand which are now gradually becoming evident.”
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