OPEC predicts massive surplus in 2015: Are oil markets going the way of iron ore?

The Organisation of Petroleum Exporting Countries (OPEC) reported yesterday that demand for its product was expected to decline to 28.92 million barrels per day (mbpd), down 3.6% from its current target quota of 30mbpd.

Rising supplies of US shale oil and other non-OPEC sources are expected to take a larger share of the market, reducing demand for OPEC’s oil.

OPEC’s continued insistence on a 30mbpd production quota looks set to deliver a sizeable surplus into a market with stagnating demand and increasing production – the exact mix of ingredients that have seen the price of iron ore destroyed this year.

The price of crude oil fell another 4% on the news.

The determination of listed companies to reduce costs per unit will likely see them expand production to achieve benefits from scale – again, it’s happening in iron ore – and may cause a race to the bottom in the price of oil.

It’s the latest turn in what I think could develop into a global oil war as OPEC tries to squeeze out higher-cost producers from the market and re-establish its dominance, which has been gradually eroded in recent years of high-cost oil.

The prices of Beach Energy Ltd (ASX: BPT), Santos Ltd (ASX: STO) and MMA Offshore Ltd (ASX: MRM; formerly Mermaid Marine Australia Limited) have all been smashed in recent weeks and investors could see another tumble today on the news.

There are several great companies in the sector, and in general ASX producers enjoy fairly low costs and the added protection of oil priced in US dollars, which works out favourably into AUD.

However with oil prices predicted to fall further in 2015, investors who wait a little longer and choose their companies with exquisite care could find a real bargain.

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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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