Will the OPEC game plan work?

Genevieve Signoret

Alternative Assets

The 5 June 2015 OPEC meeting ended in a consensus decision to leave its output target at 30 mb/d and thus hold to its November 2014 decision to allow market forces to set prices. We see this as an effort by OPEC to force U.S. shale and other non-OPEC producers to lower output in response to falling prices. This would trigger a price rebound.

Some oil market analysts believe that this will succeed in the next 18 months, citing the 60% drop in the U.S. rig count and the fact that so far this year upstream capital investment in the (U.S.) sector is down 23%.

Other oil market experts are skeptical of the OPEC strategy. They note that OPEC is producing 1.5 mb/d over its target and that U.S. shale producers are small, agile, and, best of all, young—hence still able to reorganize to sharply lower their costs.

We lean toward the skeptics and forecast a somewhat-below-consensus average price for Brent crude in 2015 of US$64/barrel and in 2016 US$60/barrel.

Having said that, we have revised up our forecasts from our deeply pessimistic projections of last January.