Brent traded within a narrow range in January despite market concerns about over-supply. In fact, the initial evidence is that the anticipated call on OPEC crude in 2014 is being increased on raised demand estimates, while OPEC output remains at or below 30mmb/d. Brent averaged USD 107.24/bbl for the quarter, slightly ahead of our USD 105/bbl forecast. We make no changes to our current forecasts, apart from mark-to-market changes to our WTI forecast. We have also adjusted our GBp-denominated European hub gas price to reflect changes in VTB Capital’s FX forecasts.
The sharp sell-off in Brent which started in late December quickly stabilised in early January around the USD 107/bbl level and remained within a tight, USD 2/bbl range for the rest of the month. The WTI-Brent spread started the month at –USD 12.38/bbl, quickly widening to the USD 15/bbl mark before closing through the rest of the month to end just below USD 9/bbl.
We published our detailed outlook for energy prices for 2014, maintaining our USD 100/bbl forecast for Brent (see Oil & Gas Price View of 10 January). Although the call on OPEC crude looks likely to fall to less than 30mmb/d in 2014 while underlying OPEC production capacity is likely to increase significantly, nevertheless we believe that OPEC will continue to target USD 100/bbl Brent and will endeavour to maintain production at around 30mmb/d in order to do so. We expect that Saudi Arabia will be willing and probably able to accommodate changes elsewhere within OPEC, based on a scenario analysis.
The sharp sell-off in Brent from late December, coupled with a focus on the potential for competition between sharply rising non-OPEC production and OPEC crude, increased market concerns at the start of the year of significant price weakness. However, the reality is that underlying estimates for demand growth have been increased while estimates for non-OPEC supply have been edged back and the call on OPEC crude in 2014 increased (see IEA Data of 22 January). Moreover, there is as yet no increase in production from Libya, Iran or Iraq sufficient to generate any market concern about OPEC’s ability to restrict output to around 30 mmb/d, while observable inventory levels are fairly tight and are not increasing. It is clearly early in the year and it is likely that pressure within OPEC will grow, but the year has got off to a fairly robust start so far as oil prices are concerned.