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Opec leaves policy unchanged as oil price rout continues

Oil prices are now at their lowest level since the financial crisis

Crude prices saw another month of sharp declines. Opec’s decision to leave its production unchanged at its November accelerated the rout in crude oil prices, sending them to their lowest levels since the financial crisis. Brent was trading at  $66 per barrel (/b) on 10 December, while WTI was trading at $62.96/b.

The reasons for the decline are well established: oversupply led by higher US production and Opec’s inability to rein in its own output, weak demand, especially from China, and a strong dollar. 

The steep and extended price decline has forced analysts to sharply revise their expectations, with most now expecting much lower prices for 2015 and 2016 than previously forecast. 

Morgan Stanley warned that prices could fall to as low as $43/b in the second-quarter of next year, when it expects prices to hit its lowest point. It has cut its 2015 Brent forecast for 2015 from $98/b to $70/b, and its 2016 forecast from $102/b to $88/b.

Jefferies lowered its 2015 Brent forecast from $90/b to $72.25/b and its 2016 forecast from $98/b to $83/b. It expects the market to start to turn in the second half of 2015, when demand picks up and reduced spending starts to hit output, especially in the US shale patch.

Bank of America Merrill Lynch has also cut its price outlook. The bank now expects Brent to average $77/b in 2015 and $85/b in 2016. Like Jefferies, BofAML expects it to take about six months for the market to bottom out. “Neither a supply reduction nor a demand increase will come easily, as oil demand and supply are pretty inelastic in the short-run,” the bank said in a research note. 

Bernstein has remained the most bullish of the investment banks, arguing that current prices are unsustainable, and that the industry needs an oil price of more than $80/b to keep up with demand. It argues that a sustained period of sub-$80/b would require a nearly 20% cut in global upstream capital spending, far more even than during the financial crisis. 

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