Societe Generale skriver i en prognose, at olieprisen kan falde yderligere
The last wave of correction to Brent prices has taken the price of the benchmark below the symbolic $100/Bbl. This breach has raised questions as to how much further Brent can decline. In our last crude oil price update1, we argued that surplus light oil in the Atlantic Basin, following the rebound of Libyan and West Africa output, was a factor in this correction, but that this surplus would be arbitraged to Asia. Negative sentiment was further reinforced by downward revisions to world oil demand estimates by institutional forecasters, driven by weaker economic growth in countries such as China. But the most important factor was the deleveraging out of Brent by money managers, as it became apparent that Iraqi production was safe from Islamic State (IS) forces. The net long futures position held by money managers, expressed as a percentage of total open interest, has been slashed by two thirds since its end-June peak (Chart 1). The withdrawal of length by these participants, usually positioned at the front of the curve, not only pushed prices lower, but led to a deep contango structure. Given that there was no similar price structure shift on the WTI curve, we do not think a material shift in oil market fundamentals or assessment of economic conditions has been at play. Investor exposure to Brent is now particularly low, suggesting that length can be now be easily rebuilt should geopolitical uncertainty hint at supply risk (such as terrorist attacks on oil faculties in Iraq or Libya) or fundamentals are perceived to tighten. In the case of fundamentals, seasonality in demand heading into Q4 will help, but, more importantly, global crude runs will exceed previous five-year highs as a result of large refinery capacity expansion in the Middle East and China.
A lower price is not good for OPEC
In the current context, will OPEC reduce production? Will Saudi Arabia tolerate a lower oil price? For now, Saudi’s oil minister is sanguine about recent price developments. But given the challenge that IS poses in the Middle East, we doubt that Saudi will want to see more fragile fellow OPEC members in the region weakened by a low oil price, including even Iran whose interests vis-à-vis IS in Iraq are currently aligned with those of the Kingdom and the US. Equally, suggestions that a manufactured weak oil price environment could be a deliberate attempt to harm Russia do not stand close scrutiny, given that such action would only strengthen President Putin’s domestic reputation and potentially lead to retaliation. As global demand estimates are adjusted lower by institutional forecasters, the ‘Call’ on OPEC crude is indeed lower. But Saudi’s ability to swing its oil output has been demonstrated repeatedly in the past (Chart 3), and it can easily reduce production to allow Brent to recover.
Keep calm and carry on
While the recent correction has adversely impacted our long Brent spread recommendation, we believe it has largely run its course and that price will revert higher. If anything, we like these more attractive entry levels to go long Dec’14/Dec’15 spreads. While recognising the risk of attempting to ‘catch a falling knife’, we nonetheless think Brent’s chances to touch $110/bbl are higher than to sink to $90/bbl.
