OPEC's oil production target announced this week signals the potential for greater co-ordination among its members, but the target itself is largely symbolic, Fitch Ratings says.
The announcement supports Fitch’s view that oil prices will continue their recovery, but does not make a strong rebound materially more likely.
OPEC members agreed a production target of 32.5m-33.0m b/d at a meeting in Algiers on September 28 ”to accelerate the ongoing drawdown of the stock overhang and bring... rebalancing forward." A high-level committee will recommend member country production levels and there will be "serious and constructive dialogue" with non-member producers on how to stabilize the oil market.
OPEC will consider the outcomes at its 30 November meeting in Vienna.
The target implies a production cut of between 240,000 b/d and 740,000 b/d from August levels. This would be the first agreed cut since 2008, and it indicates a slightly greater propensity to co-operate between OPEC's members to support prices.
This reduces downside risk to oil prices and reinforces our expectation that the stabilisation and recovery since the beginning of the year will continue. This is reflected in Fitch's forecasts for average prices for Brent and WTI of US$45/b in 2017 and US$55/b in 2018.
Fitch’s view incorporates a market that will on average be broadly balanced next year. This reflects demand improvement combined with modest production curtailments outside OPEC, principally in the US (the US Energy Information Administration this month forecast US crude oil production will drop to 8.8m b/d in 2016 from 9.4m b/d in 2015).
While the OPEC cut, if agreed, makes a modest deficit more likely next year, this will not be enough to normalise OECD stock levels, which OPEC estimates at 341 million barrels above their five-year average.
More detailed discussions over the next two months will test the willingness of OPEC members to co-operate to reduce production, says Fitch.
The envisaged reduction may well be achieved via seasonal falls in production (for example, in the Gulf where changes in domestic consumption patterns traditionally cause a substantial drop in production between August and November).
OPEC's announcement pushed oil prices higher, but they have since retraced some of their gains, and are below the year-to-date peak seen in early summer. Weaker-than-anticipated demand so far in 2016 may limit price increases.
The International Energy Agency reduced its forecast for global demand growth by 0.1m b/d earlier in September, and said that momentum would ease further in 2017 "as underlying macroeconomic conditions remain uncertain."
“Our long-term expectations for both Brent and WTI of USD65/b reflect our view on the long-run marginal cost of supply,” notes Fitch. “The oil price fall seen since 2014 has been a key driver of sovereign rating changes this year, although the recovery has eased broader macro pressures across emerging markets.”
Prices of US$40/b-US$50/b allow the majority of Fitch-rated corporate oil producers to cover their cash production costs, and a portion of their sunk costs, but remain below full-cycle costs for most producers.