CIBC’s Katherine Spector Lays Out a Few Scenarios

Head of Commodities Strategy for CIBC World Markets, Katherine Spector, hosted a conference call for CIBC clients on Wednesday morning in advance of both the U.S. Thanksgiving Day holiday and tomorrow’s much anticipated OPEC meeting and then spoke to Oil&Gas360® after the call in an exclusive interview about oil prices and OPEC.

CIBC's Katherine Spector talked with Oil & Gas 360Katherine Spector joined CIBC World Markets in 2010 to initiate Commodities Strategy for the bank’s sales and trading desk based in New York. She is responsible for the bank’s energy price forecasts and market views, and her analysis includes global energy supply/demand fundamentals, money flows, and geopolitics. Ms. Spector is a term member of the Council on Foreign Relations, and serves on the board of the New York Energy Forum, an educational organization dedicated to increasing public knowledge about energy issues. She appears regularly in print and television media and was acknowledged by Bloomberg in 2013 as the most accurate forecaster of benchmark WTI prices over a two-year span.

Spector started things off posing the question: “Why is everyone so excited about this particular OPEC meeting?”

She said that the global market has been relatively tight the past few years from both planned and unplanned production outages, and “it’s been everything OPEC can do to supply the demand.”

What to Expect from OPEC Tomorrow

Spector said that when you look historically at OPEC meetings and what comes out of them, the cartel might announce there will be no changes to production but a few months later they might increase or decrease production, or they could announce big changes to output that never happen. Spector said it’s not like a central bank meeting where a clear plan of action comes out of it. Headlines aside, Spector emphasized that what is important is what these countries actually do in the next few months, more so that what is announced after the meeting.

Spector addressed several possible scenarios:

  1. OPEC comes out and says “we have nothing to say, we’re taking no action”; if there is no conclusive announcement, Spector said that would be bearish for the market; or…
  2. OPEC says they will observe their previously announced 30 MMBOPD production quota; or…
  3. We could get a 500 MBOPD reduction announcement, but the question is: are those cuts new or is that the 500,000 barrels they are already down; or…
  4. “What would really turn my head would be if we got a 1 MMBOPD reduction of the group’s global ceiling”[which would be price supportive]; or…
  5. If OPEC reinstated country quotas and Iraq got back onto its quota, which would also be market supportive.

Spector said the Thanksgiving holiday timing can’t be understated for this OPEC meeting, because “we will have thin market participation that day which could result in big knee-jerk moves in either direction. The impact on a holiday would be on the spot price, not term prices.”

Looking at 2015, Spector thinks OPEC ideally needs to cut 1 MMBOPD in the first half of 2015 and another 500,000 BOPD in the second half.

Iran, Non-OPEC Members and Other Market Influences

Oil & Gas 360 Exploration & ProductionSpector said U.S. production growth has been tremendous “but when you look at OPEC’s share of the global market supply, the market still needs quite a lot of OPEC’s production to meet global demand.”

Regarding the talks between the West and Iran on nuclear development, there’s been no deal reached by the deadline, and they are saying talks are continuing, targeting an initial agreement in March with a final deal probably next summer. All that leads to “not a lot of change” in Iranian oil production. Spector said it would be bullish if the new U.S. Republican Congress puts through more sanctions on Iran after the new year, limiting their ability to sell oil in the market.

Spector addressed prospects for non-OPEC countries’ cooperation with OPEC, referring to Russia, Mexico, Oman and Angola, who agreed to cut 1.5 MMBOPD in 2001. But today, Mexico and Norway already have steep declines, Spector said, and are not likely to be open to production cuts. In the countries where private companies run production, you won’t see a national production cut. Bottom line, Spector says she is “not looking for an announcement of cooperative action at this meeting.”

Russia’s Influence

Oil&Gas360® asked Spector a number of questions about Russia’s influence on the world oil markets and if she thought Russia would be unlikely to cut production. Spector said she did not believe there was any chance Russia would look to lower its own production. “It’s hard to force production cuts on companies that are not the state. Also, in cold weather it’s hard to ramp production up and down. The Russians have been shielded from oil price moves. They have much larger cash reserves than most countries, and the strong U.S. dollar has helped them since oil is bought and sold using dollars. The biggest reason I don’t think they’re going to drop production though is because they have been very adamant about not doing that. I think they’re serious about being able to weather $60 Brent, and I don’t expect we’ll see any change in their production in the near future.”

The Saudis and U.S. Shale Producers

Oil Prices:  Possible OPEC Thanksgiving Day Outcomes Oil & Gas 360Is Saudi Arabia waging a private price war against the U.S. shale producers?  Spector said no. “The Saudi oil minister’s statements of late were directed at other OPEC members, not the U.S.” But the effect could be the same. “Six months of $80 [oil] could weed out weaker U.S. producers and make the strong producers stronger.” Spector said a low oil price will force shale producers to focus on the sweet spots, which could actually boost production growth in the near term. “A moderately low price for a limited period of time might just make U.S. oil production stronger,” Spector said.

If you add the non-OPEC producers together you see a net decline over the past 3-4 years, Spector said. “If we haven’t seen growth at $100 [oil prices] we’re almost certainly not going to see it at $80.” Spector expects fairly sizeable U.S. oil production growth. “U.S. production growth is the only bearish story on the non-OPEC side.”

Who Needs the Other More – Saudi Arabia or OPEC?

Oil & Gas 360® asked Spector “Who needs the other more, Saudi Arabia or OPEC?”

“It’s true that certain OPEC members can do more to help the cartel than others,” Spector said. “Certain producers are not inclined to make cuts but they can’t increase production either. Some OPEC members historically have shown a willingness to help more than others, mainly the Gulf producers—Saudi Arabia, Kuwait and the UAE.” Venezuela, Nigeria, Libya and Iran, on the other hand, are in a tight market and are not able to do much, Spector said.

U.S. Shale

Completing wells in Colorado's Niobrara Shale - Oil & Gas 360“The U.S. shale producers and their lenders are looking at the back of the curve. Backwardation is OPEC’s friend.” Spector told Oil&Gas360® that “usually in a market undergoing backwardation, you have low inventories, which makes it easier for OPEC to manage, as opposed to having to work down an inventory overhang. Backwardation makes it harder to hedge at an attractive level.”

Spector discussed the differences in tight oil production versus conventional oil. “With conventional, to bring on a new field took a lot of time and money but the production stays on for decades. With tight oil, you have leveraged production growth and the wells decline very quickly, which makes tight oil more price-elastic than what we’ve seen from conventional oil production. People are extremely hedged 6-12 months out but not further. Time matters. Out past the six month horizon is where we will see an impact.”

“It’s very difficult to come up with a price where the whole thing grinds to a halt,” Spector said. “It’s very company specific and basin specific. It’s too early to call an industry-wide or nationwide impact on CapEx.” Spector doesn’t believe that the U.S. producers will cut spending levels; instead she believes they will spend on a sure thing and pull back spending from the more difficult, more capital intensive plays.

What will the Price of Oil be in 2015?

During the call, the question was asked as to projected oil prices for the rest of 2014 and 2015. Spector said CIBC’s model favors a higher price outlook than consensus and they have called for $98 West Texas Intermediate crude oil (WTI) and $108 Brent, but “we might revise that after the OPEC meeting.” Spector said they will maintain a wider spread between Brent and WTI, because any OPEC action affects Brent pricing more than WTI.

What Put the Market Out of Balance?

“It was a confluence of variables. Libya’s production [ramping up production from about 200 MBOPD to almost 900 MBOPD by late summer] is one. We went into the summer when managers were very long. Everyone already owned oil. Also, Nigeria had trouble selling its light sweet crude so they aggressively priced it to sell and that drove Brent down. The weakened global demand has been ongoing for a couple of years—that’s nothing new—and we had this lopsided market that was very long. Then these incremental bearish headlines came out and they had an effect on the market and the ball got rolling.”

Meantime, Reuters and CNBC reported late Wednesday that a Gulf OPEC delegate told the agency that Gulf oil producers have reached a consensus not to cut oil output when OPEC meets on Thursday.

CNBC reported that Saudi Oil Minister Ali al-Naimi confirmed that the Gulf states reached a unified decision, but did not specify what the consensus was. Naimi told reporters that the Gulf Cooperation Council had reached a decision, saying “We are very confident that OPEC will have a unified position.”

Late in the day’s trading session on Wednesday, WTI was trading at $73.48 and Brent was trading down about 1% at $77.53.

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