Energy Monitor October Group Economics Commodity Research Oil prices at four-year low 15 October 2014 • Oil prices declined and reached the lowest level since 2010 • Oversupply, disappointing demand and a stronger US-dollar are the main reasons for this • The oil price development will be dominated by the upcoming OPEC meeting Figure 1: Price of Brent crude versus EUR/USD (in USD/bbl) 120 1,45 115 1,40 110 1,35 105 100 Oil prices decline fast The (Brent) oil price dropped below USD 88/bbl, the lowest level since December 2010. Earlier this year, the market was mainly dominated by fear for possible oil shortages (as a result of higher demand triggered by economic recovery), and possible production disruptions (due to the emergence of IS and the sanctions against Russia). There are several reasons why, after reaching the 2014 peak in June (USD 115,71/bbl), oil prices rapidly declined. Especially disappointing economic data from Europa and China, as well as ongoing strong oil production by both OPEC and Non-OPEC countries, lead to this pressure on oil prices. 1,30 95 1,25 90 1,20 85 80 1,15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Brent oil EUR/USD Source: ABN AMRO Group Economics, Thomson Reuters Figure 2: Global Oil Supply and Demand (x mb/d) 93 91 89 87 85 83 2008 2009 2010 2011 2012 Demand Source: IEA, ABN AMRO Group Economics 2013 Supply 2014 Oversupply remains and stronger US-dollar weighs The International Energy Agency (IEA) indicated in its monthly Oil Market Report that its expectation for oil demand in 2014 and 2015 was adjusted lower. Furthermore, the IEA signalled a rise of both OPEC and Non-OPEC oil production in September. Especially the unexpected rise (+25%) of Libyan oil production contributed to the oversupply in September. As a result, market expectations for a longer period of oil oversupply increased. This oversupply (except for only three quarters) already has existed since 2012 (Figure 2). Furthermore, the US dollar strongly appreciated as a result of differences in monetary policy between Europe and the US. This also led to extra pressure on oil prices. Volatility will remain while markets focus on OPEC The crucial question is what the direction for oil prices will be in the coming weeks. Our view is that oil prices will remain volatile, especially until the upcoming OPEC meeting on 27 November. This meeting will be very important to watch as it will set the tone for the oil supply in 2015. Non-OPEC oil production (like in the US and Canada) is expected to rise. As a consequence, to meet the moderate rise in oil demand, as a result of global economic growth, stable OPEC oil production should be enough. This will add pressure to the OPEC market share. After all, the fixed quota (currently set at 30 mb/d) will have to be set again, and an even bigger oversupply will weigh even more on oil prices. But the pressure on the separate OPEC members also increases. Iraq still has the ambitions to significantly increase its oil production. Furthermore, Libyan oil production is recovering but currently on half capacity yet. Iran will try to increase its oil exports as soon as a nuclear deal is signed with the Western countries. Finally, Saudi Arabia will try to maintain its markets share to make sure that is can meet its fiscal budget targets, even with lower oil prices. Over all, for the coming weeks, some more pressure on oil prices cannot be excluded. However, a healthy price correction higher may seem somewhat more likely after such a strong drop in prices. 2 Energy Monitor October - Oil prices at four-year low 15 October 2014 Group Economics | Commodity Research Hans van Cleef Senior Energy Economist tel: +31 (0) 20 343 4679 [email protected] Group Economics Commodity Research team Marijke Zewuster (Head) tel: +31 20 383 0518 [email protected] Hans van Cleef (Energy) tel: +31 20 343 4679 [email protected] Casper Burgering (Ferrous, Base metals) Georgette Boele (Precious metals) tel: +31 20 383 2693 tel: +31 20 629 7789 [email protected] [email protected] Copyright 2014 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on the energy market. The information in this document is strictly proprietary and is being supplied to you solely for your information. 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