OPEC Watchers Set 50-50 Odds on Production Cut in Vienna

Updated on
Oil Output
The silhouette of a contractor is seen walking up stairs at an Anadarko Petroleum Corp. oil rig site in Fort Lupton, Colorado, U.S. Oil collapsed into a bear market last month as U.S. drillers pumped at the fastest pace in more than three decades and global demand growth slowed. Photographer: Jamie Schwaberow/Bloomberg

To understand just how contentious next week’s OPEC meeting will be, take a look at the confusion it’s created among professionals paid to predict the outcome.

The 20 analysts surveyed this week by Bloomberg are perfectly divided, with half forecasting the Organization of Petroleum Exporting Countries will cut supply on Nov. 27 in Vienna to stem a plunge in prices while the other half expect no change. In the seven years since the surveys began, it’s the first time participants were evenly split. The only episode that created a similar debate was the OPEC meeting in late 2007, when crude was soaring to a record.

The split now reflects the difficult choice OPEC nations have to make. They could cut output to revive crude prices from a four-year low, at the risk of losing more market share to rival suppliers, including U.S. shale drillers. Or they could do nothing and allow prices to fall low enough to deter growth in U.S. output, a move that would also squeeze the finances of poorer members like Venezuela and Nigeria. With half the analysts in the market headed for a surprise, prices will be volatile after the meeting, according to BNP Paribas SA.

“It’s going to be a critical day,” Doug King, chief investment officer of the $200 million Merchant Commodity Fund, said by phone from London Nov. 14. “If there’s no action from the meeting, one of the most important OPEC meetings in the last 10 to 15 years, then the market will test them on the downside. If they cut 1.5 million barrels a day, you could get the Brent market back up into the $80 to $90 range.”

Output Decision

Oil collapsed into a bear market last month as U.S. drillers pumped at the fastest pace in more than three decades and global demand growth slowed. OPEC, responsible for about 40 percent of global oil output, needs to reduce production by 1 million to 1.5 million barrels a day to better balance supply and demand, Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, said by e-mail from London on Nov. 11.

The group faced the opposite situation when analysts were at odds about OPEC’s intentions seven years ago. Brent futures had climbed about 55 percent in the 11 months up to the December 2007 meeting, putting pressure on the group to increase its production target. At the same time, the U.S. economy was on the verge of its worst recession since the 1930s, following a collapse in the housing market.

Before the meeting on Dec. 5, 2007, 23 of 42 people surveyed by Bloomberg predicted OPEC would maintain its production target, while the others forecast an increase of between 500,000 and 750,000 barrels a day. On the day that the group decided to maintain output, Brent crude futures slumped as much as 1.9 percent, before settling 1.2 percent higher.

Trashed Market

“If OPEC does nothing, I think we’re seeing this market get really trashed, another $10 from where it is,” Hakan Kocayusufpasaoglu, chief investment officer at Archbridge Capital AG, a Zug, Switzerland-based hedge fund, said by phone Nov. 14. Brent futures for January settlement rose $1.03 to close at $80.36 a barrel yesterday on the ICE Futures Europe exchange in London. The front-month contract posted its first weekly gain since September.

The group’s decision is made more difficult by the size of the supply cut needed to offset growth in production outside OPEC, Kocayusufpasaoglu said. “They’re going to have to cut 2 million barrels a day over time,” he said. “That’s a lot of money to leave on the table.”

U.S. crude production will surge 800,000 barrels a day to a 43-year high of 9.4 million in 2015, adding to 1.1 million barrels a day of growth projected for this year, the Energy Information Administration said on Nov. 12.

Bakken Formation

Back in 2007, production of oil from shale rock formations that’s driving the current boom had barely started. North Dakota’s Bakken formation, one of the biggest shale oil producers in the U.S., pumped just 33,000 barrels a day in December 2007, barely 3 percent of the 1.12 million barrels a day it produced in September, data from the North Dakota Industrial Commission shows.

There’s only a “remote possibility” OPEC will agree to a cut in Vienna, Seth Kleinman, Citigroup Inc.’s head of European energy research, said in a report on Nov. 10. Members including Algeria, Nigeria and Venezuela are unwilling to reduce their own production while Saudi Arabia, the group’s biggest producer, will refuse to do so alone, he said.

Saudi Arabia plans to let U.S. shale producers be the first to cut in the face of slumping prices, Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc., said in an interview with Bloomberg Television on Nov. 13.

Below $80

“With prices below $80, and the recent signal that the Kingdom is doing what it can with other producers to ensure stability, the market should not rule out an OPEC cut entirely,” Amrita Sen, chief analyst at London-based consultants Energy Aspects Ltd., said in a report on Nov. 17. “But predicting the timing of the cut is more challenging.”

Saudi Arabia is committed to seeking a “stable” oil price and speculation of a battle between crude producers “has no basis in reality” Oil Minister Ali Al-Naimi said at a conference in Acapulco, Mexico, on Nov. 12.

Even the group’s richest members would struggle to endure a year of $70 oil, which would be required to “dent” North American output, Tchilinguirian said.

Of the 10 analysts anticipating no formal change from OPEC on Nov. 27, three said it would pledge to bring output in line with the current target of 30 million barrels a day. The group would need to trim about 250,000 barrels from the 30.25 million a day it pumped in October, data from the organization shows.

Trimming Output

Ecuador and Venezuela will ask OPEC members in Vienna to trim production above this target, an official from Ecuador, who asked not to be identified in accordance with government policy, said on Nov. 18.

“Either OPEC disappoints the market by not cutting and prices fall, or OPEC makes a decisive cut that should allow prices to recover,” Tchilinguirian said. “The OPEC meeting will have binary outcome on oil prices. In other words, the price cannot stay where it is.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE