Fitch Rules Out Oil Price Jump Despite OPEC Production Cut Plan

Mumbai: Global crude prices will not make a strong rebound, despite the first major production cut since 2008 announced by the Organization of Petroleum Exporting Countries (OPEC) this week, though a gradual recovery will continue, Fitch Ratings has 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".

Though soon after the OPEC announcement crude prices jumped, they 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 $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 $45/b in 2017 and $55/b in 2018," Fitch analysts said in their note.