Iran, Venezuela woes to keep oil at $80 in H2

Dubai - Opec announcement not sufficient to prevent another price rally in the months ahead

Crude price will average $80 per barrel in the second half of 2018 despite the Opec's decision on Friday to increase output by 1 million barrels per day, an analyst said.
Opec members' decision to increase output will not translate into full compliance because some producers are unlikely to meet the production increase target, said Dan Smith, director of commodity services, Oxford Economics.
"We have revised down our forecast for Brent, but are still fairly bullish. We now expect an average of $80 per barrel in H2 2018 and $77 per barrel in 2019 - both down by $5 per barrel. Significant supply cuts in both Iran and Venezuela can be expected in the months ahead and US producers face major bottlenecks. Even though Opec has acted to moderate market tightness, we still think that prices will push higher in the second half of this year," he said.
Since "some producers within the group are unable to boost production, we expect this to translate into a 0.6 million barrels-a-day increase," he said, adding that production will probably increase from next month.
Total production of Opec members in May 2018 totalled 31.87 million barrels per day. Brent was trading at around $75 per barrel on Friday after the announcement of Opec's output hike.
Ole S. Hansen, head of commodity strategy at Saxo Bank, said in the short term, the market will likely see crude being supported by continued geopolitical risks related to supply concerns from Venezuela, and not least Iran, as the deadline for implementation of US sanctions approaches. These concerns may, however, eventually be replaced by a shifting focus towards a continued rise in non-Opec supply and demand growth which may begin to suffer due to a slowdown among emerging market economies.
"Saudi Arabia and Russia seem to have drawn a line at $80 a barrel as being the level above where they fear that demand destruction could emerge. On that basis, we maintain the view that Brent crude oil over the coming months will remain range-bound between $71 and the low $80s before downside price pressure begins to emerge ahead of the year end and into 2019," Hansen said.
Lukman Otunuga, research analyst at FXTM, said that while Saudi Arabia and Russia proposed to ease supply curbs, other members including Iran, Iraq, Algeria and Venezuela are against such a move.
Oxford Economics' Smith said the recent adjustment means Opec is only partly moving to offset the unexpected problems in Venezuela because the South American country's production has been suffering badly in recent months because of a dire economic situation, which has led oil workers to flee the country. Oil production has declined by 0.8 million barrels per day in the past year and further fall is expected in the months ahead.
Iran is also heading into a period of turbulence as US sanctions start to bite and oil output and exports will be cut, he added.
"Many multinational companies will be forced to cut Iranian ties and major investor Total has already announced its intentions to withdraw. The problem is that US sanctions will have a severe impact because of secondary sanctions, which restrict the use of US dollars and will stop buying of Iranian crude using the currency. This significantly widens the impact of the sanctions and some analysts argue that output could drop by over 1 million barrels a day in a worst-case scenario," he added.
The likely production downturn in Iran by year-end will see pressure starting to build on Saudi Arabia and its allies to do more and raise output once again.
Oxford Economics expects oil prices to rally in the second half of 2018 before starting to trend down in H2 2019 as US bottlenecks ease. Overall, Opec's announcement will probably not be sufficient to prevent another rally in prices in the months ahead, Smith said.
- waheedabbas@khaleejtimes.com