OPEC’s surprising change of tack should buoy oil prices near-term. But according to Barbara Lambrecht, it will be difficult to implement the announced production cuts, so they see the risk of a price correction medium-term.

Key Quotes

“Oil prices have surged after OPEC’s surprising announcement of production cuts. Near-term, the change of the cartel’s strategy should continue to support prices. After all, the announced production volume of 32.5 to 33 million barrels a day is even lower than the demand for OPEC oil the International Energy Agency has estimated for 2017. Moreover, OPEC’s key player, Saudi Arabia, has shown that it is no longer interested only in securing its market shares. Rather, the kingdom wants to cooperate with other members of the cartel in order to control prices via the production volumes again. But it is doubtful that this strategy will be successful: For one thing, OPEC currently produces 33.5 million barrels a day, with Libya, Nigeria and Iran not taking full advantage of their production potential.”

“Against this backdrop, it will be difficult to fix production ceilings at the country level as planned at the OPEC meeting in late November. Even if this is achieved, there will be a strong incentive for individual countries to depart from the agreement, which in the past often led to overshooting oil production ceiling . For another, the oil market has changed fundamentally in recent years: With the shale oil producers, new “marginal producers” have been in play for several years. These are producers that return to the market as prices rise. If they can now use the higher price levels to hedge their production, they will ramp up their output more quickly and more strongly.”

“All in all, we are therefore sceptical that OPEC will manage to raise prices lastingly. Instead, we adhere to our forecast of a Brent oil price of USD 47 a barrel at year-end.”