Oil prices set to test $80 threshold

Oil prices will continue to sustain an upward trend and may test levels above $80 per barrel this week despite prospects of Opec+ hiking production by two million barrels per day from August onwards, experts say.

Industry analysts said major oil producers are expected to strike a deal on production increase when they resume talks on Monday. They said the standoff among major producers may delay plans to pump more oil through to the end of the year to cool prices that have already soared to 2-1/2-year highs at $75 per barrel, registering an increase of more than 40 per cent this year.

All eyes on Opec+

Ehsan Khoman, director and head of emerging markets research at MUFG Bank, said all eyes are on the Opec+ ministerial meeting as the next catalyst point for the near-term trajectory of the oil price curve.

“Despite our modelling estimates of a current 2.1 million barrels per day deficit in oil markets, our base case is for Opec+ to remain tactical in its output hikes and raise production by a mere 0.5 million barrels per day for August output, given the risks stemming from the Delta Covid-19 variant on mobility, and to a lesser extent, the return of Iranian barrels,” Khoman said.

Opec+, which groups the Organisation of the Petroleum Exporting Countries, Russia and their allies, voted on Friday to increase output by around two million bpd from August to December 2021 and to extend remaining cuts to the end of 2022, instead of ending in April 2022, according to sources quoted by Reuters.

The UAE agreed to releasing more oil into the market but refused to support the extension of the cuts beyond April 2022. It has proposed to postpone discussion about extending the deal beyond April 2022,” according to the sources.

Without a deal, the Opec+ may keep tighter restraints on output.

Khoman said there are prospects of Opec+ hiking August production by up to one million bpd, but even such levels will only constitute a $3 to $4 per barrel downside risk to “our end-Q3 Brent forecast of $73 per barrel”.

“We maintain our strong conviction that a vaccine-led, global economic recovery will keep Brent crude in the 70s territory, with higher Opec+ production doing little to alleviate a tight summer oil market,” Khoman said. “We also do not rule out sporadic spikes above $80 over the summer should the Delta Covid-19 variant begins to ebb and Iranian nuclear negotiations linger and lead to a delay inthe return of production to fourth quarter of 2021.”

$100 oil on cards

Kaia Parv, head of investment research at FXPrimus, said the Opec allies are likely to take measured steps before increasing production from current levels. Around 40 per cent of the production cuts introduced in 2020 have been restored, and the group is under pressure from countries such as India to increase supply even more as the global economy is thirsty for oil.

“It’s not just the importers who call for Opec to produce more. An ally of the group Russia, whose breakeven price of $40 is lowest among Opec+ members, is considering putting forward a proposal to hike production,” Parv said.

“Current oil price allows most Opec members, including the Saudis, to break even and balance their budgets by recouping at least part of their losses incurred in 2020. Market expectations of $100 oil price by year-end should offer even more relief for major exporters, as energy transition remains a key theme globally.”

Jean-Pierre Durante, head of applied research at Pictet & Cie, said two factors can explain the recent behaviour of oil prices.

First, the election of the hardline candidate, Ebrahim Raisi, in the Iranian presidential elections has postponed the prospect that Iranian oil will come back into the market. Second, the Opec+ meeting at the start of June created a lot of uncertainty by providing no indication of an increase in oil output after July. Should there be no additional oil from Opec+, there could be a supply shortfall in second half.

“Without a strong commitment to tracking the three million bpd of additional oil demand expected for second half, oil prices are likely to test $85 barrier,” Durante said.

— muzaffarrizvi@khaleejtimes.com