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Oil prices to stay volatile and range-bound irrespective of OPEC meeting outcome: Vikas Halan, Moody's

By 2019 second half, once infra bottlenecks are out, Brent and WTI divergence will narrow, says Halan.

ET Now|
Dec 06, 2018, 04.20 PM IST
Vikas Halan, Moodys-1200
Our view is that oil prices will stay volatile irrespective of the outcome today and they will stay range bound between $50 and $70, Vikas Halan, Senior Vice President, Corporate Finance Group, Moody’s, tells ET Now.

Edited excerpts:

What do you make of the OPEC meet, how important will it be? Do you expect surprises or is it going to be what the market is factoring in?

Yes, this is an interesting time of the year. Just like every other OPEC meet, we have been talking about it, but in the end, does it make any difference? There is a widespread expectation that production cut will happen but will that help oil prices? Our view is that oil prices will stay volatile irrespective of the outcome today and they will stay range bound between $50 and $70. They are not going to either way irrespective of production cuts.

We do not expect production cuts to be severe, plus the influence that OPEC has over prices is also very limited. The reason why the prices were low or are falling down has to do with the outlook on global growth especially the emerging markets growth which has been slowing down as well as the developed market growth. It is demand driven. OPEC will cut production but the other factors are also very important.

Next year, we are going to see an increase in US production in the second half of year once the infrastructural bottlenecks are taken care of.

The other factor is how slow the global economy will grow over next year which in turn will determine the demand growth for oil.

So incremental supply and demand over and above the OPEC production is going to drive the oil prices. OPEC can provide the cuts which can help settle a floor for the oil prices. They would be a little bit more confidence in the market if OPEC cuts production.

How do you see geopolitics play out at this all-important meeting today and tomorrow?

Geopolitics and oil prices have always gone hand in hand. US president had tweeted earlier asking OPEC not to cut production and that is something that OPEC would take into consideration before making any announcement. They need to ensure that they can justify the decision and I think the justification will come from there.

They expect the demand growth to be lower and in line with that they would cut production. Geopolitics will have to be managed. It is something that OPEC has done very well over the years and I do not see that changing.

If they decide that they will cut production, they need to take into account a lot of factors before they take that decision. One of the factors of course is going to be whether they want oil prices at $70 or whether they want oil prices to be closer to $60 because they do not really want to give up market share.

They do not want shale oil to get a boost so to say and increase the production. They also do not want the renewables to be more economical than oil. So, they are taking into account a lot of factors.

But the immediate one that they need to look into is the Iran sanctions. What will be the view on whether the Iran sanction will again be waived for the major countries in May and what is the expectation for demand growth. If they take all of that into account, it is a very difficult decision to make. There is going to be a cut. The amount of cut should not any way be higher than the supply glut that we see. But if it is more than that, then it might just mean that the compliance might be lower than that or the non-OPEC cut might be significantly lower than what we expect.

A lot of factors are at play. OPEC decision alone is not going to be the one that will move the market in one direction for a sustained period of time. We will keep having the milestones coming up on different accounts and different data releases will be happening. That will keep oil prices volatile which is our base case. Therefore volatility will stay but oil prices will largely remain range bound.

What do you think is the problem in terms of oil prices? Was it a consensus trade where people were only expecting the prices to go up? Unless the cuts are meaningful, , prices may not move around for WTI and Brent.

Vikas Halan: There are two aspects. One, the price movement of both these benchmarks; and second, the divergence between these two benchmarks.

Now the direction that these two benchmarks have been taking has largely been driven by the expectation of Iran sanctions first and then the waiver of it. More recently, we have seen the expectation of demand growth has been a lot gloomier than what it was say six months ago for the global economy. That means there is going to be lower demand growth. When you add the additional supplies, that variable because of the waiver of Iran sanctions and also because Saudi Arabia increased production and there was lower demand growth, you do have a direction that is low and that is what has happened.

Now production cuts along with expectation that Iran sanctions might come back again will increase the prices. It has all been very simple but we do not think that is a very sustainable move because it will eventually result in increase in shale oil production which will get help from the infrastructure bottlenecks going away in the second half of next year.

This brings us to the difference between WTI and Brent. It has been one of the highest level of divergence between the two. We have seen the WTI and Brent differential to be about $8 and that has not been seen for a very long time. Now that again goes back to the infrastructure bottlenecks in US and that is where the divergence is. By the next half 2019 or next year second half, once the infrastructure bottlenecks are out, this divergence will narrow.

Also Read

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