Abu Dhabi: Volatility is expected in oil prices in the coming days after Opec (Organisation of the Petroleum Exporting Countries) agreed in Vienna on Friday to raise production by about one million barrels per day to stabilise oil prices.
Oil prices rose by almost three per cent with Brent trading at $74.59 (Dh273.74) per barrel, up by 2.11 per cent and West Texas Intermediate by 2.75 per cent to 67.34 per barrel at 6:20pm UAE time.
“We expect volatility to remain elevated in the weeks ahead. In this regard, compliance adherence will be central to the determination of the front-end of the oil price curve. Moreover, beyond Opec, the ongoing US-China trade animosities will only add to the expected oscillation in oil prices,” Ehsan Khoman, director, head of research and strategist for the Middle East & North Africa (Mena) at MUFG Bank told Gulf News.
He said despite a group-wide consensus agreement among members to raise production by one million barrels per day theoretically, practically the accord will only add 600,000 barrels per day of production to global markets given Venezuelan and Mexican challenges to raise output.
“In principle, the agreement is a much needed display of unity from Opec plus members, although clarity still needs to be given as to the allocation by each country, particularly as to whether certain members will be allowed to add more output to compensate for the shortfalls from others,” he added.
The latest development comes as a rise in oil prices was creating problems for the world’s top oil consuming countries like India, China and the US with the US president Donald Trump even criticising Opec for higher oil prices.
Indian oil minister Dharmendra Pradhan also said higher oil prices is pinching its economy and called for a reasonable oil price that is favourable for both consumers and producers.
Collective long-term benefit
Spencer Welch, director of the oil markets and downstream in the London-based IHS Markit said the most significant thing is the alliance is still in place despite differences among member countries on output increase.
“Iran [and Venezuela and Angola] appear to support this even though it is likely to be detrimental to their short-term revenue because they can’t raise production. It is possible that all parties believe it is in their collective long-term benefit to preserve the alliance and work together,” he said.
Stephen Brennock, a London-based analyst from brokerage firm PVM Oil Associates predicts the bulk of the production increases will come from Saudi Arabia, Kuwait and the UAE.
Iraq has the capacity to increase output but is currently producing above its agreed quota and therefore unlikely to hike supply, he said.
“All in all, the new output deal is a victory for oil producers and consumers alike. Prices look set to remain above $70 per barrel and the potential for a supply squeeze in the second half of the year has been suppressed, at least for now.”
Well-supplied and balanced market
Opec along with non-Opec members like Russia have been cutting production by about 1.8 million barrels per day since January 2017 to help lower global oil inventories and support oil prices.
In his opening address at the conference, Suhail Al Mazroui, UAE Minister of Energy and Industry, and the current President of Opec said they are focusing on making sure that it is a well-supplied and balanced market.
“So far in 2018, the pace of investment has gradually picked up, but we are still not seeing enough robust investment in long-cycle projects. These are the base load of future supply, the foundation of this industry’s future, and will be vital to long-term global economic expansion.”
He also said that Opec is looking to further institutionalise cooperation with non-Opec members in order to continuously adapt to ongoing market dynamics, in pursuit of the interests of producers and consumers while promoting healthy global economic growth.
