Bullish forecast for oil on Opec move
UNCERTAINTY ABOUT THE DEAL COULD PUSH PRICES UP
Oil could increase by $2 a barrel in the short term due to uncertainty surrounding the decision taken by the Opec and its allies to increase production by one million barrels per day, analysts said.
Organisation of Petroleum Exporting Countries (Opec) and non-Opec members like Russia agreed to increase production at a meeting in Vienna on Friday and Saturday but did not provide a specific number on how much production hike they are targeting in the coming months.
Saudi Oil Minister Khalid Al Falih said that the increase should be close to one million barrels per day.
Opec and non-Opec members have been cutting output by about 1.8 million barrels per day since January 2017 to help lower global oil inventories and support oil prices with a high level of conformity recorded among the participating countries to the agreement.
Uncertainty
“There is uncertainty on how the deal will materialise in the next one to three months. In the short term it means a little bit upward for oil prices and in the longer term for the next six to nine months, it means downward for oil price because of more oil coming to the market,” Jaafar Al Taie, managing director of Manaar Energy group told Gulf News over the phone.
He added that there could be $2 upward movement in the next one to three months because of the uncertainty and $2 to $3 downward pressure once things become clearer on the number of barrels entering the market.
“Either way, it is not going to be a big impact as Saudi Arabia and the UAE do not want to have a big impact. They are trying to avoid wide fluctuations in the price of oil.”
Speaking about the changes to the Opec agreement at the Vienna meet, he said one should pay attention to spare capacity.
“Saudi Arabia is going to give a nominal figure of may be one million barrels but the real production increase in the next six months to one year will be in the area of about 500,000 to 700,00 barrels per day because that is the limit of spare capacity Saudi Arabia, Russia and the GCC have.”
Saudi Arabia promised to act decisively to keep oil prices under control, signalling a real supply boost approaching 1 million barrels a day is on the way to global markets.
“We will do whatever is necessary to keep the market in balance,” Saudi Energy Minister Khalid Al Falih told reporters on Saturday, while sitting alongside his Russian counterpart Alexander Novak at the Organisation of Petroleum Exporting Countries (Opec) headquarters in Vienna. Consumers can rest assured that “their energy supplies are available, are being stewarded by a responsible group of producers.”
Al Falih went out of his way to give a detailed explanation of how the so-called Opec+ deal will work, clarifying a vaguely worded agreement and contradictory statements from other ministers that spurred a rally in crude futures on Friday. It would be troubling if that jump became a trend, he said, adding that producers with spare capacity, such as Saudi Arabia, can fill any gap left by falling production elsewhere.
“The only country that can increase production is Saudi Arabia, so its interpretation of the deal is the one that matters,” said Ann-Louise Hittle, a veteran Opec watcher at consultant Wood Mackenzie Ltd.
An Iranian Opec delegate immediately criticised the Saudi position, saying the agreement didn’t allow any member to replace someone else’s market share. Countries that do so will be cheating on the deal, the delegate said, asking not to be named because of the sensitivity of the matter. Venezuela’s Energy Minister Manuel Quevedo made the same argument on Twitter.
The Iranian delegate added, however, that Venezuela and other countries producing below their quota have few ways of enforcing their views, beyond statements of disapproval.
Friday’s deal between Opec members pledged a “nominal” supply increase of 1 million barrels a day. In reality, ministers said several countries are unable to pump more so the real output boost would have been smaller — ranging from Iran’s 500,000 barrel-a-day estimate up to Iraq’s prediction for as much as 800,000.
Saturday’s accord, in which non-Opec countries ratified the previous day’s deal, dropped the pledge that the 1 million barrela-day increase should be shared proportionally among members, opening the way for the full volume to flow, Al Falih said.
Compromise
The vague wording of that agreement left it open to such a broad range of interpretations and, helping to secure a lastminute compromise that overcame Iranian opposition to any increase.
Saturday’s accord, in which non-Opec countries ratified the previous day’s deal, dropped the pledge that the 1 million barrel-a-day increase should be shared proportionally among members, opening the way for the full volume to flow, Al Falih said.
“If we allocated the number pro-rata basis among the 24 countries, given the capacity of those countries that can increase, it had been estimated that about 60 per cent will be achieved,” Al Falih said. “But because we went away from allocation on a pro-rata basis, we will be closer to 1 million than to 600,000 barrels a day.”
The group’s communique still pledged a return to 100 per cent compliance with the original 2016 agreement, but Al Falih insisted that no individual country will be subject to a strict output cap.
Novak was fully aligned with Al Falih, saying Russia would contribute as much as 200,000 barrels a day to the supply boost.
“The real increase of production would be a figure exactly close to 1 million,” Novak said in an interview with Bloomberg Television. “The decision is very straightforward.” UAE Minister of Energy and Industry Suhail Al Mazroui gave similar assurances. Al Falih also said the Opec+ Joint Ministerial Monitoring Committee, which has overseen the group’s supply cuts, will play a key role in managing how production is increased. Both Russia and Saudi Arabia are members, and the committee’s increasing importance will help cement their dominance over a coalition that pumps more than half the world’s crude. Saudi Aramco had anticipated this week’s decision and was already ramping up output, Al Falih said.