Oil prices sunk to a 7-year low following OPEC’s decision to remove the group’s production quota of 30 million barrels per day (mb/d); a level OPEC has maintained since 2012. NYMEX WTI contract fell to US$37.51 as the news broke, a 15 percent month-on-month fall. The ICE Brent contract suffered a similar fate, dropping 15 percent over the course of the month and below a key psychological support level at US$40/b. In its December monthly report, OPEC revealed the November production was at a 3-year high – prompting many to question the purpose of a production quota that is never adhered to.
"The apparent discord among OPEC members continues to influence sentiment and oil prices. With ICE Brent comfortably below US$40/b, we’re seeing the full effects of OPEC’s decision to leave the taps running; adding further pressure to the fiscal budgets of oil producing countries, while inflicting further challenges for the upstream industry as a whole."
– George Johnson, Associate Director, Oil & Gas, KPMG in the UK
OPEC’s decision in Vienna to maintain an ‘open-tap’ policy, therefore disregarding a production ceiling - previously at 30 mb/d - has pulled the ICE Brent crude futures curve lower. High crude production levels in Saudi Arabia, Russia, Iraq – in combination with anticipation that Iranian crude will be exported in 2016 – has added downward price pressure to an already bearish market.
Unseasonably warm weather in certain parts of the US has seen spot price gas slip as demand for heating fuel remains supressed. November temperatures in the northeast were impacted by a strong El Nino pattern and were the warmest in the last 10 years. The US National Weather Service outlook for the remainder of the western hemispheres’ winter is for sustained and milder than normal temperatures across the northern tier of the US.
"If recent mild winter weather forecasts are realized in the coming months, US natural gas prices will struggle to move much above the current level of US$2 per MMBtu."
– Thomas G Ruck, Director, Market/Treasury Risk, KPMG in the US
Despite oil prices coming under significant pressure and spending cuts being implemented across the energy sector. M&A activity on the Norwegian Continental Shelf remains buoyant. Several deals have recently been announced, with more expected. Recent deals include asset swaps, asset deals and share acquisitions.
"There are signs of optimism out of the North Sea – Norway in particular, in the form of increased M&A activity. With a noticeable narrowing of the gap between buyer and seller expectations for the oil price, a number of Norwegian Continental Shelf assets are gaining considerable interest in the market. Several transaction have been completed recently and additional deals in this region is to be expected over the next 12 to 18 months. Potential buyers are attempting to catch the window of opportunity to complete deals at "reasonable" valuations levels before equity markets starts to price in more optimistic market views."
– Per Daniel Nyberg, Partner, KPMG Law Advokatfirma AS – Norway
As the 21st annual iteration of the Conference of Parties (also known as COP21, or the 2015 Paris UN Climate Change Conference), significant breakthroughs were expected from this year’s conference. A number of draft declarations have been released throughout the week, tying in themes of financing, a focus on urban emissions, technological developments, human rights and transparency in action/support. With the vision set out five years to 2020, many of the international communities are targeting to stop rising global temperatures by 2025-2030. An ambitious target to say the least.
"This year’s conference has been characterized by deep divides between developed and developing countries. The two industrializing powerhouses: China and India, believe a deal that aims to keep temperatures below 2-degree Celsius – an ambitious target set by wealthier countries - will impair the growth of developing states; rather, they are pressing for 1.5-degree Celsius target over a more lengthy timeline. The clash on key issues escalated at a time when China declared it’s first "Red Alert" for heavy smog, a condition exacerbated by China’s large usage of coal for power generation. Yet, with current solar and winds developments in China the highest in the world, the world’s largest carbon emitter is proactively tackling its 'War on Pollution'."
– Oliver Hsieh , Associate Director, Commodity & Energy Risk Management for ASEAN, KPMG in Singapore
Brent forecasts were virtually unchanged across the forecast period. Analysts maintain their prediction of a supply overhang through 2016, before a medium-term recovery in prices as CAPEX cuts and low spare capacity support Brent. The inventory overhang, potential increases in US interest rates and new supply from Iran are seen as key risks.
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Henry Hub forecasts have seen little change since last month. Supply growth continues to be robust, but improved demand growth from 2016 is expected to lead to a gradual recovery in prices. Analysts continue to expect an oversupplied market in the near term, although El Nino risks and a warmer than average weather outlook for the upcoming winter could result in a more bearish outcome for 2016 prices.
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