Commodity Update; Crude Oil – 18 November 2014

Crude oil remains under pressure; uncertainty abounds

Crude oil benchmarks remained under pressure during the last week leading both WTI and Brent to establish new multi-year lows.

At present both Brent and WTI are trading below $80 per barrel and with the next OPEC meeting no more than 9 days away, the world is still none the wiser as to whether or not the group will take action to support prices when it meets on the 27th November. For this reason, uncertainty still abounds for the global oil community.

In the absence of news from OPEC we do not envisage a substantial move from oil benchmarks ahead of the meeting on the 27th. However, should the group opt to defend its market share and allow market prices to continue to exert pressure upon the shale oil producers of North America (NA), then we would expect to see further downside across both benchmarks.   

On the opposite side of the same coin, should smaller middle eastern producer states succeed in swaying the collective OPEC group into cutting production, then prices could undergo a partial recovery.  

However, we view this as unlikely given that the current price weakness is attributable to long term durable factors, most notably increasing supply in the North American market. This means that any reduction in output will only serve to strengthen the hand dealt to NA shale producers, by ensuring that production remains economical and that investment into the industry continues.

All in all, with geopolitical and conflict risks set aside; we do not envisage a substantial or sustained recovery in oil prices over the near term.

In contrast, we believe that a prolonged period of price weakness is the minimum that can be expected from oil markets over the near to medium term, while the potential for further downside also remains a credible risk at the present time.







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