Friday’s long awaited OPEC meeting finally took place with delay this morning and ended on a positive note, along with a new country at its board, The Republic of Congo.
The Organization of Petroleum Exporting Countries finally reached an agreement of principle, though the exact production amount and the specific breakdown by member remain absent of the official communique. This agreement, which seemed hopeless following Iranian Oil Minister Bijan Namdar Zanganeh comment on Thursday that the OPEC would not convince him not to use his veto during the assembly, finally came into force, thanks to Saudi Arabia and Russian strong commitment to support the increase.
Following the announcement, both Brent Crude and West Texas Intermediate (WTI) rally continued, trading at 75.24 and 67.27 at the top of the summit, a rise of +2.95% and +2.60% respectively (year-to-date: +12.60% and +11.11%) due to higher demand expectations for the coming periods.
Although a “common” agreement appears to have been found, the odds are pretty clear that only a minority of members are going to be the big winners of this increase, as the big leaders Saudi Arabia and Russia (as a non-member), the two largest oil producers before the US, have the production capabilities for ramping up the production above current level. For sure, nominal production estimates of OPEC – non-OPEC members of 1 million B/D to up to 1.5 million B/D according to Russian Energy Minister before the summit seem overstated.
Experts are rather counting on an effective production of no more than 600’000 B/D, a number that Saudi oil minister seems to support. Indeed, multiple OPEC members such as Angola and Venezuela continue to face structural hurdles that prevent them from increasing their capacity of production (e.g. offshore drilling platform investment shortage and economic instability respectively). In fact, 50% of OPEC members spare capacity (production capacity – effective production) remains below 60’000 B/D.
Planned on 3 December 2018, the Next OPEC Ministerial Meeting remains far away and anything could happen since then. Many parameters such as the US-Iran sanctions or the US shale infrastructure constraints could drastically change the tendency.
For these reasons, under current scenario settings, we would support prices of $70 and $63 for Brent Crude and WTI respectively for the second half of 2018, as third quarter seasonal demand peak remains.
The impact of further US sanctions towards Iran would “naturally” tighten total oil production supply (Iran accounting for 12% of OPEC total production). We would also interpret a rise of 600’000 B/D as rather weak, as it weighs less than 0.50% of world daily production, thus, supporting an upward bias for the oil industry in general.
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by Vincent Mivelaz