Deutsche Bank disagrees, arguing that most of the GCC states can absorb a downward shift to prices to nearer to USD 80 per barrel before they will be forced to take action.Still, a strengthening dollar scenario could see that trend occurring sooner rather than later."In the event of the US trade-weighted index strengthening by around 10% in the twelve months to December 2013 Brent crude oil prices would fall to USD 93 per barrel by the end of 2013," wrote Soozhana Choi and Michael Lewis, analysts at Deutsche Bank. "Moreover given our bullish targets for the US dollar into 2014, it would imply Brent declining towards USD 85 per barrel by the end of 2014."
Even before the current decline, the US Department of Energy had expected OPEC's oil revenues to fall from USD 1.05 trillion in 2012 to around USD 955 billion. Even if prices remain constant after falling 6.3% this year, that still constitutes a further USD 60 billion drop in OPEC revenues in 2013.There have even been murmurs of an emergency OPEC meeting before the scheduled May 31 event.Despite the prospect of lower oil prices, Turker Hamzaoglu, analyst at Bank of America Merrill Lynch, is still recommending investors to keep the faith with Gulf bonds and equities."The move lower in oil prices, if prolonged, could pressure GCC credits, though the local bid is keeping regional credits well supported," Hamzaoglu said. "Valuations have improved in Abu Dhabi and Qatar after the US Treasury rally, but we prefer Dubai given its progress on GRE restructuring, macro improvement and higher yield."
Why oil will average USD 110 in 2013
As was evident from the last few weeks, markets can turn on a dime. Although commodities have been routed since a depressing IMF report which cut global GDP growth, investors are not willing to take defensive positions just yet.A Bernstein Research study says there are seven very good reasons why oil prices won't collapse and will average around USD 110 per barrel this year.DEMAND FOR DRIVING: Lower gasoline prices will trigger a driving mania with people taking longer road trips in the United States, Europe and developing countries. This would put a floor on prices.EUROPEAN PRODUCT IMPORTS: European crude importers have traditionally reacted very quickly to price drops."As Europe's crude oil stocks remain 100,000 barrels below their five-year average levels, at 3.13 million barrels in February, we assume European countries would look to rebuild inventories to the five-year average level in the next three months, should oil prices contract further," Bernstein said.
CHINA STOCKS: Expect China to build its inventories at lower prices. In the past, Beijing has been on a buying spree every time prices have dipped.US WELLS: Lower prices would deter American operators from drilling for oil in North America's shale oil plays.
MATURE WELLS: Bernstein has examined 77,000 wells across non-OPEC countries and has come to the conclusion that they are maturing more quickly than anticipated. Examples of maturing fields in Russia and North Sea suggest oil supplies are not as abundant as perceived.
OPEC BUDGETS: While GCC oil breakeven budgets average around USD 80 per barrel, the wider OPEC group is more comfortable with USD 100 per barrel. Oil prices below USD 90 will force OPEC to enforce a production quote among its members.OPEC EXPORTS: OPEC may maintain production but still hold back on exports during periods of falling prices."One example is Saudi Arabia, where oil exports scaled back by a full 1.5 million bpd in first quarter of 2009 when the oil price crashed," said Bernstein. "More recently, 2Q12 makes an interesting data point: Although crude production fell from 350,000 bpd from peak in April to trough in August, crude exports fell by a full 800,000 bpd over the same time period."
Overall, a fall to USD 90 per barrel will see markets tighten by a full 1.5 million bpd, which would trigger a move back to the USD 100 per barrel mark, the bank forecasts.
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