Font Size

- Aa +

Thu 22 Jan 2009 12:46 PM

Font Size

- Aa +

NBK sees OPEC cuts vital for oil price recovery

Analysts say price could languish at low levels if members don't cut output as agreed.

There are signs that the oil market is normalising but prices may languish at recent lows if OPEC members fail to stick to target quotas this year, according to a report by National Bank of Kuwait.

The Kuwaiti bank said that although prices have slipped this week, the early year increase in oil prices could signal that more traditional fundamentals are returning to the market.

“It seems likely that the impact of OPEC’s recent decisions to reduce output by a cumulative 4.2 million barrels per day (mbpd) – including a record 2.2 mbpd cut at its Algeria meeting on December 17 – is beginning to be felt,” NBK analysts wrote in a research note.

Most analysts believe global demand for oil fell last year for the first time since 1993 amid high prices in the first half of the year followed by a severe economic downturn in the second half.

The complex nature of these two forces has resulted in large swings in institutions’ forecasts.

Local media reports suggest that unlike in previous cycles, OPEC members are delivering on their promises of major cuts in output, NBK noted.

Potentially huge swings in the supply/demand balance means stabilising crude at what OPEC appears to consider a fair price - $75 per barrel - may be difficult.

In a worst case scenario, global oil demand could fall by as much as 500,000 barrels per day.

If non-OPEC countries (mainly Latin America and the former Soviet Union) manage to achieve a small increase in production of 0.2 million bpd, OPEC’s ability to implement its own production cuts will be crucial in preventing further price falls.

“Assuming that all of the 4.2 million bpd of pre-announced cuts are realised, this should prove possible, perhaps with the help of a further, more modest cut of 0.5 million bpd in the second quarter,” NBK said.

In that case, Kuwait Export Crude (KEC) could go as low of $32 in the first quarter of this year, before drifting up towards $40 in the second half.

But prices may languish at or below their recent lows for much of the year should OPEC discipline break down and member states fail to agree or stick to lower target quotas.

One such scenario would involve OPEC only managing to implement around half of the quota reductions announced in Algeria and no further cuts this year.

That would cause the price of KEC to fall from $50 per barrel in the fourth quarter of 2008 to $29 per barrel in the current quarter and average just over $30 per barrel for the rest of 2009, NBK said.

For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.