OPEC oil ministers are expected to agree on action to support crude prices at around $100 a barrel when they meet in Vienna in mid December but will unlikely discussion new quotas, a key Saudi bank has said.
The ministers of the 12-nation Organization or Petroleum Exporting Countries, meeting on December 14, will avoid talks on new quotas until Libyan production is fully restored and Saudi output is trimmed back following its unilateral increases after the last failed meeting in June, the Saudi American Bank group (SAMBA) said in its latest monthly bulletin.
“As such, the effectively irrelevant quotas agreed back in 2008 will remain in place,” it said, noting that Saudi Arabia had boosted output above nine million barrels per day to offset disruption in conflict-hit Libya.
“That said, we expect the meeting will be less contentious than the last and that a consensus will emerge over the need to support prices at around $100 given members higher budget break-even prices.”
SAMBA said it believes Saudi will look to balance its output against increasing Libyan supply while monitoring prices carefully.
“Should market fundamentals and prices weaken significantly during the first half of 2012, then a response from OPEC is possible at its June meeting,” it said.
“This would likely involve a cut in output led by Saudi Arabia, although if necessary the kingdom could combine with other GCC members to cut production without broader OPEC cooperation.”
The report noted that current supply and demand projections from major energy agencies would suggest an OPEC cut is possible as combined increases in non-OPEC output and OPEC NGLs are expected to be sufficient to cover all projected demand growth next year.
But it added that developments in market fundamentals remain hard to predict and 2012 looks set to be another year of uncertainty.
“Looking through this fog of uncertainty our tendency is to expect that weaker market fundamentals will exert downward pressure on prices,” it said.
“Downside risks on the demand side loom large while supply developments appear biased on the upside. However tempering any decline will be the fact that the marginal cost of production and price level needed to encourage necessary investment has risen, and probably now stands at around $90… US shale oil is particularly expensive to produce.”
The report said market participants would also remain sensitive to any supply disruptions given their concerns over OPEC’s spare capacity, which appeared inadequate to rapidly compensate for the loss of Libyan crude.
It said a “geopolitical risk premium” is also expected to prevail as political strains in the broader MENA region remain unresolved. “The escalating tensions over Iran’s nuclear ambitions are a case in point.”
“Perhaps most importantly, Saudi Arabia with or without OPEC, is expected to act to provide support to prices if necessary. We thus project that average Brent prices will hold at $100 in 2012, although there may be large movements during the year as markets respond to evolving economic and political developments.”
The study said a similar price is projected for 2013, adding that such predictions are somewhat on the bearish side compared with others, and with current futures which are holding at around $108 for Brent in 2012.