OPEC agrees to increase Oil output effect July, Brent likely to average USD 73/bbl in 2019
Source: FxWire Pro - Commentary / 24 Jun 2018 11:20:27 America/New_York
OPEC has agreed to increase oil output by 1 million barrels per day effective from 1 July. The aim of the deal is to return total compliance to the current output agreement to 100 percent, noted Danske Bank in a research report. Compliance has been over 100 percent in 2018 since some nations, especially Venezuela, have seen a decline in production. OPEC is set to hold the next biannual meeting on 3 December.
OPEC, since November 2016, has kept production lower to underpin a tighter oil market balance, reduce global oil inventories and underpin higher oil prices. This year oil prices have increased to the highest level since 2014 in part because OPEC has become ‘over compliant’ with the production cuts due notably to falling production in Venezuela at a time when demand has been on the rise due to higher global economic activity, noted Danske Bank in a research report.
This development paved the way for a deal to return supply to the market and lower ‘over compliance’. OPEC is increasing production to keep the current output agreement, which runs until the end of this year.
The price of Brent crude rose around USD1/bbl to above USD 75/bbl on the news. The fact that oil prices are increasing when OPEC is returning supply to the market reflects a concern in the market heading into the meeting that OPEC would agree to hike output further than the level required to guarantee 100 percent compliance. For the remainder of the year, the deal today lowers the upside risk to prices from the risk of lower output.
It is uncertain what OPEC will do when the current deal expires at the end of the year. A decision on this would probably be made on 3 December.
“The deal today does not affect our current forecast for Brent to average USD72/bbl in H2 and USD73/bbl in 2019”, added Danske Bank.
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