Malaysia Oil & Gas - OPEC sticking to its output target

■ The 30m bpd oil production target acts more as a floor than a ceiling, having pumped >31m bpd since Mar 2015.

■ Oil price to remain volatile; all eyes on Iran/shale’s output over the next 6 months and OPEC’s next meet in Dec 2015.

■ Maintain NEUTRAL; Yinson, BArmada, Dialog and KNM are preferred BUYs.

What’s New
The Organization of Petroleum Exporting Countries (OPEC) has agreed to maintain the cartel’s collective oil production output at 30m bpd over the next six months. All the OPEC members have also agreed to reinstate Indonesia into the pact.

Iraq’s oil minister admitted that OPEC was slow to recognize the impact of shale oil by two years and is paying the mistake now. Nonetheless, Saudi Arabia sees no threat from lower oil prices, stating that the fundamentals of the market remain excellent with a strong demand outlook. Iran’s oil minister said most OPEC members agree that USD75/bbl is a fair price.

What’s Our View
Whilst OPEC’s decision to keep the 30m oil output was widely expected, the target, in our view, acts as a floor rather than a ceiling. In reality, OPEC has been pumping above the target, at above 31m bpd since Mar 2015, with Iraq and Saudi Arabia being the primary contributors.

The 30m bpd target is a continuation of OPEC’s strategy since Nov 2014 to control market share at the expense of maintaining a higher oil price environment. Whilst OPEC is re-sending a signal that it will not cut output to balance the oil market, it would instead want to see the cut in global oil production from non-OPEC countries (production: 58m bpd of oil), which have higher marginal cost of production and are not profitable at current prices. The pressure points, in our view are on the marginal, deepwater and shale oil field developments, just to name a few.

OPEC’s recent abdication as a swing producer has contributed to the global oil market returning to a fully free market for the first time in over 80 years. The decision on this has led to oil price volatility. US, on the other hand, with its shale oil boom will not be able to replace OPEC’s role as a swing producer. Instead, US shale will act as more of a price ceiling for oil than a floor due to higher production cost and production flexibility.

OPEC’s next meeting, scheduled for 4 Dec 2015, will likely have a bigger impact for it will need to address the prospect of Iran returning in full force to the world oil market once sanctions are lifted. Also, it would be interesting to see shale oil’s production, which has proven to be resilient to date. These two factors are likely to contribute to continued oil price volatility in 2H 2015. (Read Report)

Source : Maybank Kim Eng Research

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