OPEC delivers on its supply commitments – how will that affect oil prices?

OPEC continues to deliver on its commitments on crude oil production while advancing structural and rebalancing changes in the oil market, led by the recent changes to OPEC supply agreements with a main focus…

OPEC delivers on its supply commitments – how will that affect oil prices?

OPEC continues to deliver on its commitments on crude oil production while advancing structural and rebalancing changes in the oil market, led by the recent changes to OPEC supply agreements with a main focus on combating market volatility and restore long-term confidence.

The organization maintains that the current fundamentals support an average price of around $60/bbl in 2018 (initial projection based on an assessed balance for the year of 56.7 million b/d), or slightly lower than 2017 (55.6 million b/d). Current factors supporting price include:

Prices remain well supported by demand from non-OECD markets (including the emerging markets in Asia) at 2.4 million b/d (higher than the 2.2 million b/d predicted in November 2017), or somewhat higher than 2016/17 (2.3 million b/d);

Potential upside price risk is from geopolitical tensions which might disrupt supply and increase oil prices;

OPEC is managing the market by maintaining oil production commitments. The organization’s 10 producer members – including non-OPEC member Russia – have boosted collective oil production to 33.24 million b/d in March from 30.9 million b/d in January – higher than previously agreed to, with the largest increase from Saudi Arabia, the largest oil producer. In November, OPEC and non-OPEC producers had committed to reduce output by 1.8 million b/d in 2018. OPEC’s current agreements (and 2 other potential ones) include a cutback of 558,000 b/d on the Arabian Gulf Cooperation Council (AGCC) countries. While the cuts have not totally prevented a dip in oil prices, they have averted a decline in oil supply that would have caused a larger price spike.

OPEC/non-OPEC production guidance was revised in March to compensate for historically weak winter oil production in the Americas and decreases in supply from non-OPEC countries – as a result, the number of OPEC/non-OPEC oil production commitments remains largely unchanged at 31.8 million b/d, or 59% of global production. The number of collective pledges for the U.S. has risen to 3.1 million b/d, up from 2.9 million b/d in January. Non-OPEC cuts dropped to 1.7 million b/d, according to a revised survey conducted by the IEA, down from an earlier 2.4 million b/d estimate. Global supply still only exceeds demand by 1.5 million b/d.

OPEC is consistently delivering on its production commitments as it has previously coordinated much better with other members and has dramatically reduced quality and cost variability and been able to allocate budgets more effectively. The optimal production level of OPEC/non-OPEC would be above the historical level, but the more important factor is the level of support from market participants, such as banks, investors, and companies. Market participants are, therefore, making a separate decision about whether oil prices will average over $60/bbl or not. Given that the oil market is now close to balance with lower spare capacity and increased geopolitical risk, the lower level of long-term price expectations should not make it difficult for producers to deliver their pledged supply.

OPEC is set to meet in May with the aim of maintaining production increases and rolling out a strong supply reduction agreement to rebalance the market that will see a 1.5 million b/d of production reductions carried out through the year.

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