Abu Dhabi: Oil prices are expected to remain volatile in the coming days due to lack of clarity from Opec (Organisation of the Petroleum Exporting Countries) and non-Opec members on the magnitude of production increases, analysts said.
For the first time since the production cut agreement came into effect early last year, Opec members, particularly Saudi Arabia, along with Russia, discussed last week the possibility of gradually raising oil production in the second half of this year.
Currently, oil prices are trading higher due to a production cut agreement between Opec and non-Opec members, healthy global demand, and geopolitical tensions in the Middle East. The decision by US President Donald Trump to pull out of the Iranian nuclear deal also bolstered oil prices over the last few weeks.
“There is a bit of disagreement between Saudi Arabia and Russia on how much magnitude of production increase is expected at the next Opec meeting on June 22 and, more importantly, which members are going to take which allocation of an increase,” said Ehsan Khoman, director, head of research and strategist for Mena at MUFG Bank. He added that what the oil producers decide to do when they meet in Vienna is likely to depend on price dynamics over the next few weeks.
“Should the sell-off we witnessed last week gather steam, then they could well put off the orchestrated end to their production cuts. However, should prices stabilise or reverse course, they are more likely to go ahead with a return to market, with the key factor to observe being the size and magnitude of the production increases and the broader implication this has on supply-demand dynamics.”
On projected increases, he said Saudi Arabia and other Opec members are reportedly favouring the idea of increasing output by 300,000 to 400,000 barrels per day, which reflects the view that supply and demand aren’t out of alignment and gradual increases are preferable. Meanwhile, Russia supports a more aggressive strategy of increasing output between 800,000 to one million barrels per day to rapidly reduce the current over-compliance to the agreement.
”The key factor to observe is the size and magnitude of the production increases and the broader implication this has on supply-demand dynamics. The greater the magnitude of the phasing-in of production cuts, then the likely larger downside impact to oil prices, and vice versa.”
US crude West Texas Intermediate was trading at $67.88 per barrel, down by 4 per cent when markets closed on Friday. Brent, on the other hand was at $76.44 per barrel, down by about 3 per cent. The talk of a production increase by Russia and Saudi Arabia had a bearish impact on oil prices.
Ole Hansen, head of commodity strategy at Saxo Bank said the group could raise production by 300-500,000 barrels per day to meet the shortfall from Venezuela thereby bringing the compliance back to 100 per cent from the 150 per cent seen in recent months.
“Opec and Russia which have kept 1.7 million barrels per day away from the market since early 2017 are likely to step in sooner than expected to stabilise the market and prevent it from rallying to levels where global demand begins to be negatively impacted.”
Khoman said shale revolution in the US as well as the intensification of Opec and major oil producers to increase production is expected to have a bearish impact on oil prices in the medium term.
“We forecast Brent to average $70.6 per barrel and WTI to average $65.1 per barrel in 2018, respectively,” Khoman said.
