Ahead of OPEC’s next meeting on Thursday 27 November, Graham Martin, Managing Director at Optima Investment Management (Europe) provides his view on the impact discussions around the levels of oil production may have on investors…
It's likely the market is currently pricing in the nervous expectation that OPEC won't agree to cut production. If OPEC announced a co-ordinated cut of 500,000 barrels per day or more we would expect a rally in oil and oil related equities.
While core-OPEC will undoubtedly demand some output reductions from members such as Angola, Nigeria, Venezuela, Qatar, and Algeria, the main cuts will have to come from, and are more likely to be forthcoming from, the Persian Gulf States.
While the economics of shale oil development in the US and Canada remain solid, activity levels will moderate due to the fact that capex funding will slow as cashflow slows. Outside of North America, modest reductions in spending levels – mainly deferrals of projects – will also reduce the rate of growth in non-OPEC supply.
We believe the long-term picture for oil prices remains stronger than it has been in decades supported by: a) evidence of continued growth in world oil demand; and b) a historically low spare capacity held by Saudi Arabia (of about 2 million barrels/day).
