OPEC’s decision not to forsake market shares to stabilise prices resulted in the downswing in oil quotations rapidly extending towards the 70 dollar mark….
Intesa Sanpaolo – Research Department – For professional investors and advisers only
This will support GDP growth in consumer countries to no negligible extent. For the major European economies, the drop in oil prices recorded over the past few months, if maintained for a year, is worth 0.3% of GDP. More aggressive scenarios imply much stronger impacts in 2015.
The half-yearly meeting of OPEC yielded the announcement that the targeted production level remains 30 million barrels a day (Mb/d). The Secretary General of OPEC, El-Badri, whose mandate was confirmed until the end of 2015, specified that the decision to keep the target unchanged at 30 Mb/d is the group’s “response” to the production boom in non-OPEC countries, whereas the group currently has “no price target”. El-Badri stressed that the group intends to produce an average of 30 Mb/d in cumulated terms in the next six months, suggesting that the market will be characterised by a major excess in supply in the first half of the year if all producer countries maintain their current production levels. According to the estimates drawn up by OPEC in November, the call on OPEC crude to guarantee equilibrium on the market amounts to 28.4 Mb/d in 1Q and 28.5 Mb/d in 2Q, around 1.5 Mb/d less than the current production target, and almost 2 Mb/g less than produced by the group in recent months. OPEC’s decision is explained by the intention to split with non-OPEC producers the responsibility of balancing demand and supply. As a result, OPEC is now leaving the task of striking a new equilibrium price to the market. In fact, El-Badri stressed that any market price is deemed “adequate”, as long as it allows investments to be supported and remunerated. As a result, we envisage a short-term target price of 70 dollars for Brent oil and 67 for WTI, without ruling out more extreme scenarios. Many months of low prices will be needed to balance the market, leading to the exit of shale oil producers at higher marginal costs (the most dynamic component of supply).
The drop in oil prices is a very welcome bonus in the current difficult phase being experienced by the European economy. The projections priced into the post-OPEC baseline scenario imply a 14% decline in average prices in euros in 2014, and a drop as large as 20-30% in 2015. The average price in euros of Brent Crude has decreased this year by over 11 euros, from 86.8 in 2013, and may contract by a further 15-25 euros in 2015. Based on net imported volumes in 2013, direct savings for the major European countries deriving from the improved terms of trade amount to 0.3% of GDP for every 10 euro decline of the average price, and is 20% greater for Japan. The beneficial effect will free purchasing power for households, and cut production and shipping costs for enterprises, offset in part by slower exports towards oil producer countries (exports to OPEC countries account for around 6% of the Italian exports). The 2008-09 decline was followed by an 18% contraction in exports to OPEC countries, but in that case the trend was exacerbated by the global crisis, and not solely explained by lower oil prices. Over time, the effect will also be countered by stronger imports of goods and services tied to the increase in domestic demand.
As it was mostly concentrated in 4Q 2014, the positive effect should only be fully felt at the turn of the year, and intensify over the following months, should oil prices continue to drop in the course of 2015. Assuming a further 15-25 euro decline in the average price of oil, the elasticity described above would imply a further beneficial effect well in excess of 0.5% of GDP, should the change prove persistent. The potential impact in the short term would greatly outbalance the possible effects of the multi-year investment plan unveiled this week by the European Commission. However, it should also be said that the trends could reverse in the following years, as it happened in 2009-10.
Quelle: BONDWorld.ch
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