Why a sharp oil price drop looks unlikely, despite any Saudi, US output increase

U.S. two-dollar billsPhoto by Leslie Shaffer

Oil prices aren’t likely to drop sharply, even if Saudi Arabia, the U.S. and other producers were to ramp up production in response to potential output drops in Venezuela and Iran, Nomura said in a note on Tuesday.

Crude prices have fallen over the past week. Nymex WTI crude oil futures for July were at US$67.07 a barrel at 9:19 P.M. SGT on Tuesday, down from last week’s highs of around US$72.90, while ICE Brent crude futures for July were at US$75.98, after touching highs of around US$80.50 last week, according to Bloomberg data.

“We think markets may have reacted negatively to oil-producing nations’ consideration of loosening output caps in reaction to reduced output by Iran,” Nomura said. But it added, it didn’t see a need to become overly pessimistic on the outlook.

“We think supply-demand could tighten as U.S. sanctions on Iran and Venezuela reduce output,” it said, estimating the reduction in supply could top 640,000 to 1.04 million barrels a day.

It estimated Iranian output could decline by 300,000-500,000 barrels a day. Venezuela’s output could fall to 900,000-1.10 million barrels a day in the fourth quarter, down by 340,000-540,000 barrels a day from April’s levels, it estimated.

At the same time, it wasn’t clear how much additional production would come from elsewhere.

“Although it is difficult to predict how much producers such as Saudi Arabia will ramp up production, we think such nations have little incentive to sharply lower oil prices, so we think any output increase is likely to be just sufficient to hold down the rise in oil prices,” Nomura said.

For U.S. output, Nomura estimated that oil prices would need to rise by around US$10-US$16 a barrel to convince U.S. producers to ramp up production enough to fully fill the estimated supply decreases of 640,000 to 1.04 million barrels a day.

“If the risk of output increases by oil-rich countries makes U.S. shale oil producers reluctant to invest in higher output, we think demand could continue to outstrip supply,” Nomura said.