Sabine Schels, Commodity Strategist at BofA-Merrill Lynch, explains that unless oil production guidance for 2015 goes negative or Saudi Arabia changes its policies, WTI and Brent may fall to $32/barrel and $31/barrel respectively by the end of Q1 2015.
Key Quotes
“To restore equilibrium in the oil market, we would need a sizeable supply cut of at least 1 million b/d. In our view, it is not reasonable to expect non-cartelized production to shut down immediately as prices fall because many producers are well hedged, face very low cash costs, are partially protected by falling domestic currencies or tax breaks, or are notoriously slow to react.”
“According to our estimates, with the exception of shale oil, which is cash flow intensive and thus dependent on price (current or forward), non-cartelized crude oil output in many parts of the world is not price sensitive at all, particularly in the first 12 months.”
“In the absence of a moderating agent like Saudi Arabia, this means prices have to fall below operating cash costs (non-shale) or well below cash flow breakevens (shale) for marginal producers.”
“In our view, non-OPEC oil supply cuts will not come easy in the short run, as operating cash costs sit below $40/bbl. True, investments will be put on hold as some of the world’s output is challenged below $70/bbl in the long run. However, production guidance continues to point up in 2015 for most listed companies.”
“Unless production guidance for 2015 goes negative or Saudi Arabia changes its policy, the market could become more disorderly as oil prices find a floor around operating cash costs.”
“As a result, we now expect oil prices to spiral down toward the end of 1Q and target Brent at $31/bbl and WTI at $32/bbl.”
Key Quotes
“To restore equilibrium in the oil market, we would need a sizeable supply cut of at least 1 million b/d. In our view, it is not reasonable to expect non-cartelized production to shut down immediately as prices fall because many producers are well hedged, face very low cash costs, are partially protected by falling domestic currencies or tax breaks, or are notoriously slow to react.”
“According to our estimates, with the exception of shale oil, which is cash flow intensive and thus dependent on price (current or forward), non-cartelized crude oil output in many parts of the world is not price sensitive at all, particularly in the first 12 months.”
“In the absence of a moderating agent like Saudi Arabia, this means prices have to fall below operating cash costs (non-shale) or well below cash flow breakevens (shale) for marginal producers.”
“In our view, non-OPEC oil supply cuts will not come easy in the short run, as operating cash costs sit below $40/bbl. True, investments will be put on hold as some of the world’s output is challenged below $70/bbl in the long run. However, production guidance continues to point up in 2015 for most listed companies.”
“Unless production guidance for 2015 goes negative or Saudi Arabia changes its policy, the market could become more disorderly as oil prices find a floor around operating cash costs.”
“As a result, we now expect oil prices to spiral down toward the end of 1Q and target Brent at $31/bbl and WTI at $32/bbl.”
