Despite last minute suggestions that OPEC’s 30mmb/d production target might be increased, it was left unchanged at yesterday’s meeting despite the debate going on for four times longer than scheduled.
Much more importantly, in our view, Saudi Arabia gave no clear visibility that it was ready to cut production yet. That leaves OPEC production running almost 2mmb/d above target.
At current OPEC production levels, we believe the market will remain oversupplied by around 1.0mmb/d through 2H12. We regard that dynamic as price negative, even from current levels. We expect market attention will now become even more focused on the potential impact on Iranian supply to the market from the new US sanctions and any potential implications from the round of nuclear negotiations between P5+1 and Iran this coming Monday and Tuesday in Moscow.
We expect the incremental impact of the new sanctions to be fairly limited and believe that has been underscored by the US decision to grant ‘significant reduction’ waivers to all historic large importers of Iranian crude, with the exception of China.
That leaves the nuclear negotiations. The outcome of these negotiations is highly unpredictable but we believe the most likely result will be a continuation of discussions. If that is the outcome, we expect the oil price to be highly vulnerable in the short term to further downside until there are good reasons to believe that supply is being curbed to match demand.