Brent ‘not likely to fall below $100 for long’
Dubai, August 17, 2014
Saudi Arabia’s oil buffer is ample and Brent will not likely fall below $100 per barrel for long, unless Saudi wants it to, said a report released by BofA Merrill Lynch Global Research.
If oil averages $105 per barrel, Saudi output would have to fall below 7.8 million barrels per day from 101 today to push the government budget into deficit, added the report from BofA Merrill Lynch Global Research, titled, "BofA Global Energy Weekly – “Opec discord and oil stability”.
Also, Saudi spare capacity likely stands north of 2.4 million barrels per day, the report highlighted.
Meanwhile, Saudi Arabia’s reaction to swings in oil prices has become faster and deeper than ever, according to an impulse-response analysis conducted by BofA Merrill Lynch Global Research.
Oil volatility muted on micro & macro factors
Oil prices have been steady in recent years in spite of growing geopolitical tensions. In fact, oil has not been this stable since the break-up of Bretton Woods in 1971. Prior to that, oil prices and currencies were quasi-pegged to gold, a vastly different global financial architecture compared to today.
Why are oil prices so flat? “In our view, both macro and micro factors are partly to blame. On the macro side, massive monetary easing, wide currency fluctuations, or muted inflation have helped depress volumes across all asset classes. At a micro level, a more diverse oil demand base, a break away from Opec country quotas and normalizing inventories help explain it,” the report said.
Opec moves away from individual country quotas
Opec supply responses required a change in country quotas, something that would happen twice a year after arduous negotiations. However, after a major discord in June 2011, country quotas were put on hold. A subsequent December meeting then set an overall production ceiling of 30 million b/d on top of an existing aggregate production quota of 24.85 million b/d.
In effect, key swing producers (Saudi, UAE, and Kuwait) were handed a 5+ million b/d band to help balance the 93 million b/d global oil market. So Saudi output in started to track prices, world production volatility collapsed, and the correlation of output across Opec countries fell apart. – TradeArabia News Service