Photographer: Luke Sharrett/Bloomberg

Contrarian Who Predicted OPEC's Woes Says Group Should End Cuts

  • Commerzbank analyst anticipated OPEC would fail to boost price
  • Group should end cuts, raise output to beat shale: Weinberg

When OPEC and its allies unveiled their plan last year to re-balance world oil markets, prices rallied and most analysts expected the supply cuts would succeed. With the strategy now faltering, one bank that predicted failure says the group should call it quits.

There’s been a wave of price-forecast downgrades over the past month as analysts from Goldman Sachs Group Inc. to Bank of America Corp. and Citigroup Inc. acknowledged that OPEC’s production curbs haven’t cleared a global glut. One forecaster who’s kept his outlook unchanged is Commerzbank AG’s Frankfurt-based head of commodities research Eugen Weinberg, who never believed the cuts would work in the first place.

“OPEC’s strategy was doomed from the very beginning,” Weinberg said. “It’s all about shale and the sooner they recognize that the better.”

Last December, when most banks were projecting the group’s intervention would send oil rallying toward $60 a barrel or higher by the end of 2017, Commerzbank anticipated a slide below $50. OPEC’s curbs “will result in a more rapid increase in U.S. oil production,” Weinberg wrote on Dec. 8. American output has since reached a near-two-year high and is on track to hit a record.

The bank’s bearish outlook has proved accurate. Weinberg predicted in December that Brent would average $50 a barrel in the second quarter, just 79 cents away from its actual value in the period. He sees the grade averaging $48 in the fourth quarter.

Abandon Ship

Now, Commerzbank believes the Organization of Petroleum Exporting Countries should abandon the output curbs entirely and revert to its previous policy of maximizing production to squeeze rivals out of the market.

“They should let prices crash to kill shale and then aim for steady price increases in the long term,” Weinberg said.

Other forecasters, while recognizing that OPEC’s policy hasn’t worked out as planned, say the group should persevere.

Goldman Sachs said the organization should double down, quietly making deeper production cuts in order to accelerate the depletion of inventories. Failing to deliver this “shock and awe” to markets could send prices below $40 a barrel, analysts Damien Courvalin and Jeffrey Currie said in a report on July 10. For Commerzbank, OPEC should encourage just that kind of price rout to limit growth in U.S. shale oil.

This was the original approach favored by former Saudi Arabian Oil Minister Ali al-Naimi when prices started falling in 2014. He was replaced last summer by Khalid Al-Falih, who played a central role in organizing the supply cuts in cooperation with Russia last year.

As that deal was unfolding, al-Naimi continued to strongly defend his policy in his autobiography, writing that the best way to re-balance the market is still to let supply, demand and prices work. Weinberg said this approach causes immediate economic pain, but would preserve the group’s market share and revenue over the longer term.

“It’s better to suffer a horrible ending than a horror without end,” he said.

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