BoA Merrill Lynch - OPEC: Brothers in arms… or not?
Resource nationalism, not economics is driving oil markets. As expected, OPEC decided this week to leave crude production quotas unchanged for the third time, but emphasized both the need for compliance among cartel members and co-operation with non-OPEC producers. Of course, price stability has come mainly thanks to cuts implemented by Saudi Arabia, Kuwait and the UAE. With limited global spare crude productive capacity outside Saudi Arabia, it has been relatively easy to prop up prices into a $65-$75/bbl band. By contrast, in the absence of a cartel ready to reduce volumes in other energy markets like US natural gas, prices have continued to spiral down, desperately looking for a supply-rationing point.
But oil producers are not necessarily a happy family. While OPEC members seem pleased with the attained result, the path ahead will not be easy. Simply put, there are just too many free-riders around. The cartel haslost a significant portion of market share in global crude production in the last year mostly to Russia, and compliance is falling rapidly among some members. With 1.3 million b/d of capacity coming on stream this year and an output reduction of 1.2+ million b/d, we estimate that Saudi Arabia's "missed oil revenues" areprobably running at close to $100 billion per annum, or almost 25% of GDP.
With high distillate stocks, a warm winter is a clear risk. High distillate stocks in the OECD economies present a clear downside risk to oil prices this winter. In fact, the premium on put option prices relative to calls in theWTI crude oil market is already at record levels. In a very warm winter, we estimate global oil demand could drop by 500 thousand b/d relative to trend, posing a significant challenge to OPEC. Would Saudi, Kuwait and UAE cut output again to save Russia and the rest of OPEC? With global oil producers free-riding on these three OPEC members, any additional supply cut may not come easy.
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