Experts are predicting an agreement to cut oil supply will be reached at next week’s OPEC meeting, which should help stabilise a market that has seen prices plummet in the last two months.
The price of Brent crude was below $US60 on Friday, falling from a 2018 high of $US86.29 at the start of October.
Ahead of the December 7 OPEC meeting, Commonwealth Bank commodities analyst Vivek Dhar anticipates that “a deal will be reached.”
“They will agree to cut production by 1 per cent,” he said. “Supply discipline knows that it has to act in that way and comments from Russia [on Thursday] indicate that that is the case.”
Energy-intensive sectors like aviation and manufacturing are benefiting from the correction in prices. Qantas’ earnings estimates have been raised by UBS, Deutsche Bank and Credit Suisse, as cheaper fuel lowers the operating costs incurred by the company. UBS increased its 12-month share price target for Qantas from $5.60 to $6.30. The airline was trading at $5.96 on Friday.
The risk is the OPEC meeting puts an end to that windfall, although that would be positive for the energy producers.
CBA’s Mr Dhar referred to comments made by Russia’s deputy foreign minister Sergei Ryabkov as signals that Russia intends to join OPEC in cutting supply.
Speaking before the G20 summit from Argentina, Mr Ryabkov said “nobody is interested in either an artificial deficit or an oversupply,” and that oil markets were in need of “smooth price dynamics” and “higher predictability”.
The market responded positively to these statements, causing oil to rally.
An agreed 1 per cent cut in oil supply at the OPEC meeting would be enough to stoke a rebound, Mr Dhar said. But this would be a slower process compared to the sharp response that triggered the correction.
“I don’t think price will correct in the same manner,” the CBA analyst said. He expects oil prices to be “$US75 a barrell by middle of next year.”
Oil prices went into freefall in October, driven in part by President Donald Trump’s Iranian sanctions surprising the market. President Trump imposed strict oil export sanctions on Iran but then granted waivers to eight countries, allowing them to continue to import oil for 6 months. As a result, the supply contraction the market predicted never materialised.
“The Trump sanctions on Iran ended up being a lot softer than the market had feared,” said economist David Bassanese. This resulted in too much oil making its way onto the market, forcing prices down.
Mr Bassanese said low oil prices are benefiting consumers, and will “help spending coming into the Christmas season.”
“It is a boon for global growth and consumer spending,” he said.
With respect to the link between the commodity price and the bowser, Mr Bassanese said “It seems to have come through fairly quickly already and that is the positive here.” Consumers in Australia are experiencing the lowest petrol prices in eight months, according to the Australian Institute of Petroleum.
Analysis from RBC Capital Markets finds that if oil production was sustained by the conclusion of the OPEC meeting, the result would be an oversupplied market in 2019. It estimates an excess of 1.4 million barrels per day in this scenario, holding other variables constant and assuming near consensus supply forecasts for the US and Russia.
Extracted from AFR