Published: Sun, June 24, 2018
Markets | By Terence Owen

Russian Federation welcomes OPEC decision to increase oil production within OPEC+

Russian Federation welcomes OPEC decision to increase oil production within OPEC+

Iran's oil minister Bijan Zanganeh said on Saturday that OPEC and its allies will increase oil output by close to 500,000 barrels per day after agreeing a new production deal on Friday.

The production increase will partly undo a 1.2 million barrel cut OPEC agreed on in late 2016 that has helped push up the price of oil.

Saud Arabia's minister of energy, Khalid Al-Falih, said after Saturday's meeting that the exact allocation for each country would depend among other things on their production capacities.

Overall, Crude oil prices may show weakness through the second half of 2018, with the prospect of OPEC production growth mostly influencing market psyche into a "Bearish" mode. Subsequently, the prospect of a full-blown trade war will likely dent risk on sentiment, which in turn will likely keep a lid on further gains for crude prices.

Questions remain over the ability of some OPEC nations - Iran and Venezuela in particular - to increase production as they struggle with domestic turmoil and sanctions. This not only adversely impacts one of OPEC's largest member's upstream activities, further weighing output levels lower by 600,000 bpd, but also lead to the retraction of production volumes half amounting to nearly half of OPEC's agreed total reduction of 1.2 mbpd. It would be troubling if that jump in prices became a trend, the minister said, adding that producers with spare capacity, such as Saudi Arabia, can fill any gap left by falling production elsewhere.

The most recent price rally followed an OPEC decision to restrict supply in an effort to drain global inventories.

In the past 18 months, the group had capped output from more than a dozen countries, including Saudi Arabia, Iran and Qatar.

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US President Donald Trump had re-imposed sanctions on Tehran - and hence they have fewer buyers.

But unexpected outages in Venezuela, Libya and Angola have effectively brought supply cuts to around 2.8 million bpd in recent months.

The group's communique still pledged a return to 100% compliance with the original 2016 agreement - ending a period of deeper-than-intended cuts - but Al-Falih insisted that no individual country will be subject to a strict output cap.

Global marker, Brent, traded above US$100 a barrel for several years until 2014, dropping to nearly US$26 in 2016 and then recovering to over US$80 last month. United Arab Emirates Energy Minister Suhail Al Mazrouei gave similar assurances.

Much of the current production shortfall has come from Venezuela, where an economic crisis has savaged petroleum production.

Saudi Arabia and Iran stood side by side, and proved that politics can take a back seat when it comes to serving the best interests of OPEC members.

"With a committed production adjustment over the 500 days till mid-May this year, the stock overhang has been brought down to nearly zero", al-Sada told S&P Global Platts ahead of the Opec meeting in Vienna. "OPEC is set to hold the next biannual meeting on 3 December", wrote analysts at Danske Bank.

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