Crude prices could plunge toward $30 a barrel – a rout of about 40 per cent from current levels – unless Opec extends production cuts that are propping up the market, ABN Amro Bank said.
The Organisation of Petroleum Exporting Countries agreed at the end of November to limit collective production by 1.2 million barrels a day. It then got support from non-member nations, most notably Russia, that meant total planned curbs of about 1.8 million barrels daily.
However, the agreed period for those reductions was the first half of this year, leaving uncertainty about what happens from July.
“If they don’t continue with this trend then the oil price could drop back to where it was two years ago,” said Hans van Cleef, ABN Amro’s senior energy economist, adding he was unsure whether the deal to restrict supplies would persist. “Oil prices could easily go back to the low $30s.”
After an initial surge when the cuts were announced, crude prices have traded in an ever-narrower range amid signs US producers are filling the supply void created when Opec and its allies reduced output.
Becalmed
Futures in New York are stuck in the tightest range in 13 years, and Brent implied volatility is around the lowest in more than two years, data compiled by Bloomberg show. The markets are becalmed even though money managers hold record contracts betting on a rally, equating to more than a billion barrels of oil.
Since October, the baseline month for most Opec cuts, the US added almost 500,000 barrels a day of production, Energy Information Administration figures show. The 11 Opec nations that participated in the cuts accord lowered their daily output by about 1.14 million barrels. Libya and Nigeria, Opec members that were not required to take part, added about 220,000 barrels a day.
Mr Van Cleef said his view is that the “downside risk has become much bigger than previously”, with signs that the market had already priced in the production cuts. With compliance at about 90 per cent – a historically high level – “we don’t see any upside from Opec anymore”, he said. “What we do see is more risk of higher production in the US, we see a rise in inventories.”
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