Opec set to open taps in Vienna

dubai - Opec+ may ease output curbs to keep prices at $75

The world's top oil producers are expected to strike a crucial accord at their meeting in Vienna on Friday on easing voluntary production limits that would help keep Brent prices at $70 and $75 per barrel in 2018 and 2019 respectively, oil market analysts said.

At the mid-year meeting, members of Opec and other exporters, including Russia (Opec+), may announce a data-dependent, gradual oil output increase adding up to 1.2 million barrels per day (bpd) by end 2019.

Suhail bin Mohammed Faraj Faris Al Mazrouei, UAE Minister of Energy and Industry, said he is optimistic about the international oil market regaining balance, thanks to cooperation between the Opec and its partners.


"Looking ahead, I remain optimistic that we will fulfill our goal of delivering sustainable oil market stability, which is intended to serve the long-term interests of producers, consumers and the global economy," Al Mazrouei, who is also president of Opec Conference for 2018, said ahead of the 174th meeting of the group in Vienna on June 22.

"Stock levels have dropped significantly since the beginning of 2017 and the market is moving ever-closer to becoming rebalanced," he clarified. "This will undoubtedly be a key topic of discussion in our June meeting," the minister said.

The UAE Minister of State and Adnoc Group CEO Dr Sultan Ahmed Al Jaber said the oil and gas industry stands on the threshold of a historic step change in demand for its products, driven by growth in every major market.

"While we can never predict the future price of oil, the global economic outlook gives us reasons for optimism," Dr Jaber said at the 7th Opec International Seminar in Vienna on Wednesday. "Every major economy is growing and this is reinforcing demand for every product we supply along the extended hydrocarbon value chain," he said.

Opec had maintained a record level of compliance, often exceeding the required 1.8 million bpd to reach nearly 2.5 million bpd, according to BP's latest annual statistical review of world energy. Since 2017, collective efforts by Opec+ in line with the landmark output cut pact, have led to a three-year revival in oil prices, which saw Brent surge to an $80 level towards the end of May.

"First, we see an output increase announcement that targets a modest deficit. Our baseline is for a combined 200,000 bpd quarterly average ramp from Russia, Saudi Arabia, the UAE and Kuwait through end 2019 that adds up to a total of 1.2 million bpd, although we expect flexibility to meet any output gaps left by Iran, Venezuela or other producers," said Justin Post, analyst at Bank of America Merrill Lynch (BofAML). In this scenario, Brent will be at $75 per barrel in 2019.

However, if Opec members continue on their current paths, with Saudi Arabia, Russia, the UAE and Kuwait keeping their output level flat in 2019 versus 2018 levels, their output will decline by 700,000 bpd on average during 2019 with Brent rising to $90 in 2019.

On the other hand, if Saudi Arabia, Russia, the UAE and Kuwait decide to collectively increase output by 300,000 bpd per quarter on average through the fourth quarter of 2019 from the second quarter of 2018 levels, Brent will drop to $65 per barrel, analyst said.

In 2017, global oil demand growth averaged 1.5 million bpd and is forecast to stay at 1.5 million bpd in 2018 and 1.4mb bpd in 2019.

Joyce Tran, analyst at BofAML, said the fact that US shale supply (crude and liquids) is growing faster at the moment than it was at the 2014 highs is flying under the radar.

"Yet, US shale still presents a major market share risk to Opec and Russia because of its short-cycle response nature. As such, the next cyclical demand downturn will likely create a true trade-off between permanent market share levels and price for Opec+."

Ehsan Khoman, head of research and strategist for Mena at MUFG, Japan's largest bank, said oil prices may be reaching their peak levels. "As such, we believe that a sustained period of Brent above $80 per barrel and $75 per barrel for WTI will lead to demand destruction becoming more likely, through a combination of enhanced efficiency and a slowdown in the global economy. Based on this thought process, our econometric models point for Brent and WTI to average $75.9 per barrel and $69.8 per barrel in the second quarter of 2018, respectively. For 2018 as a whole, we forecast Brent and WTI to average $70.6 per barrel and $65 per barrel, respectively."

He said Saudi Arabia has already commenced reviving oil production ahead of the Opec+ meeting by raising oil production by 162,000 bpd to 10.03 million bpd in May 2018, from 9.87 million bpd in April 2018.

"While the increase is not of a large magnitude per se [and still within its Opec+ production quota], it does mark a major shift in strategy in becoming interventionist to raise market share and away from supporting prices. The geopolitical risks, which remained front and centre for most of May, have now been superseded by a policy shift by Opec+ wherein they are deliberating to revive output on concerns that prices have risen too much, leading to weakening demand and a slowdown in the global economy," said Khoman.

Igor Sechin, CEO, Rosneft, which pumps around 40 per cent of Russia's oil, said crude at $70 to 80 a barrel was a "comfortable level" and expressed satisfaction with the results of Russia's joint supply cuts with Opec. Rosneft claims that it can restore about 150,000 barrels a day within three months.

"The growth in Brent crude prices to a comfortable level of $70 to $80 per barrel is a result with which we are fully satisfied," Sechin said.

- issacjohn@khaleejtimes.com