Oil markets have moved dramatically over the last year. The USA is increasingly self-sufficient and investment in US refining capacity means that the domestically produced crude (which cannot be exported) is able to be processed rather than leading to large stockpiles. Inventories at Cushing at the end of September were reported at 20.5 million barrels, compared to 32.8m bbls a year before and 43.9m bbls two years ago. As a result, the gap between WTI and Brent pricing has narrowed and at the time of writing is less than $3, whereas only 20 months ago it had hit $23.
Several years of high oil prices have encouraged record levels of E&P investment and production capacity has increased whilst consumers have been driven to moderate oil consumption through increased efficiency or fuel switching. The IEA have recently cut their oil demand forecast for 2014 and 2015 citing a “weaker outlook for Europe and China.”
With prices heading south all eyes are on OPEC and the upcoming meeting in November: will the group act in a disciplined manner and restrict output to support the benchmark price? Or will the members be driven purely by the desire to deliver as much volume to the market as possible? Early signs are not good. Saudi Arabia surprised the market on 1st October with a larger cut in prices relative to the Oman/Dubai average than expected, prompting fears of a ‘price war’ amongst producers. Official OPEC quotas have been abandoned for several years and so many will look to the key swing producer, Saudi Arabia, for action, perhaps hoping that long-serving oil minister Ali Al-Naimi will step forward as ‘Mr November’.
Steve Robertson, Douglas-Westwood London
+44 1795 594734 or Steve.Robertson@douglaswestwood.com