Lastly, OPEC could react to low oil prices if EM demand falters. While OPEC fiscal budget break-evens have increased in recent years, Saudi can fund its deficit via government reserves and local debt as long as Brent stays in a $55 to $70/bbl range. However, Saudi cannot sustain its spending sub $40/bbl for very long, on BofA’s estimates. As such, the incentive for OPEC to cooperate increases exponentially on lower oil prices. Put differently, an OPEC cut (loud or quiet) to keep prices above $50/bbl makes good financial sense. As long as it does not encourage a competitive response, a low cost revenue maximizing oligopolist would lower volumes to increase its total intake.
On a separate note, BofA’s analysts also cut back on the NYMEX US natural gas average price forecast for 2016 from $3.90/MMBtu to $3.50/MMBtu to reflect a falling cost structure and persistently high inventory levels. Even then, an output dropping sequentially over the next 12 months looks very much possible and bullish bias relative to the forward persist. It is very much likely that US natural gas demand will be very strong next year as thermal coal plants are retired. But most importantly, a bumper year is expected for US natural gas exports to Mexico and to the rest of the world via LNG. Higher prices will have to bring US nat gas supply and demand into balance next year.
