Global crude prices will not make a strong rebound, despite first major production cut since 2008 announced by OPEC this week, though a gradual recovery will continue, Fitch Ratings said.
"OPEC's oil production target announced this week signals the potential for greater co-ordination among its members, but the target itself is largely symbolic. The decision supports our view that oil prices will continue their recovery, but does not make a strong rebound materially more likely," Fitch said in a note.
The OPEC members had, on September 28, agreed a production target of 32.5-33.0 million barrels a day at their meeting in Algiers "to accelerate the ongoing draw-down of the stock overhang and bring...Re-balancing forward".
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Though soon after the OPEC announcement crude prices jumped, it soon lost the gains and are now below the year-to- date peak level seen in early summer.
The report also noted that the weaker-than-anticipated demand, so far in 2016, limits price rise. Moreover, earlier this month, the International Energy Agency had lowered its forecast for global demand growth by 0.1 mbd apart from warning that even the current momentum would ease further next year "as underlying macroeconomic conditions remain uncertain."
"Our long-term expectations for both Brent and WTI of USD 65/b reflect our view on the long-run marginal cost of supply," the agency said.
A high-level panel of OPEC will recommend members production levels and there will be "serious and constructive dialogue" with non-member producers on how to stabilise the market.
OPEC will consider the outcomes of these measures at its November 30 meeting in Vienna.
Since the highs of early 2014, crude prices are down close to 55 per cent, despite a massive demand spike in India, which is the third largest market.
The new target implies a production cut of 240,000 to 740,000 b/d from August levels, indicating a slightly greater propensity to cooperate between the OPEC members to support prices, says the report.
"This reduces downside the risk to oil prices and reinforces our expectation that the stabilisation and recovery since the beginning of 2016 will continue. Accordingly, we see the average price for Brent and WTI of USD45/b in 2017 and USD55/b in 2018," Fitch analysts said in their note.
This cements our view that the market will on average
be broadly balanced next year, says the report, adding it also reflects demand improvement combined with modest production curtailments outside OPEC, principally in the US.
The US Energy Information Administration earlier this month had forecast that American crude production will drop to 8.8 million barrels a day in 2016 from 9.4 mbd in 2015.
While the OPEC cut, if agreed, makes a modest deficit more likely next year, this will not be enough to normalise the OECD stock levels, which it estimates at 341 mbd above their five-year average, the report said.
While more detailed talks will test the readiness of OPEC members to lower production, the envisaged reduction may well be achieved via seasonal falls in production.
The Gulf markets normally sees substantial drop in production between August and November due to the seasonal changes.
On the impact of the steep fall in crude prices on the macro health of the oil importing economies since the summer of 2014, the report says this has been a key driver of sovereign rating changes this year, although the recovery has eased broader macro pressures across emerging markets.
Prices of USD 40-50/b allow the majority of Fitch-rated corporate oil producers to cover their cash production costs, and a portion of their sunk costs, but remain below full-cycle costs for most producers, the analysts concluded.
