Market Report & Analysis for 6/26/2018 Morning Edition
Morning Market Overview
The first leg of the OPEC/non-OPEC accord modification was agreed to at the formal OPEC meeting on Friday with the last leg agreed at the joint meeting on Saturday morning. The outcome of the Saturday meeting was in sync with OPEC’s agreement in maintaining 100 percent compliance to the production cutting accord set in 2016 or thus eliminating all under-producing or a compliance level strongly above 100 percent.
The nominal increase in production between OPEC and non-OPEC participants to the 2016 accord will be around 1 million bpd commencing July 1. The agreement does not specify a specific volume increase rather it refers to the 100 percent compliance. Also, it does not lay out specific targets for each of the participating countries rather it appears to be undefined and thus suggests that countries may produce more than what their allocation would be under 100 percent compliance agreement.
The reason several countries like Venezuela, Libya and others have been underproducing versus the accord targets and may not be able to increase production now. Saudi Arabia said they will increase production very quickly as they have already put the Aramco wheels in motion and they already have demand for the additional barrels. Saudi Arabia said they would increase production in the hundreds of thousands of barrels per day with the exact number determined later. Russia said they would increase production by around 200,000 bpd during the second half of year.
The Saudi Minister did say the release of barrels will be gradual and not all immediately. We view the OPEC/non-OPEC outcome as being neutral to slightly supportive to the oil complex for the short term as the increase will likely be less than the 1 million bpd level. We believe the increase will act as a cap on prices while growing global demand will provide the floor in the market. Over the coming months barring anything new on the geopolitical front or an unforeseen economic risk event we would expect oil prices (basis Brent) to trading in a range of $60 to 75/bbl as the market digests and adjusts to the additional supply coming into the market.
A larger risk to prices could come from the evolving talks of a tariff war between the US China and Europe. Right now, we still categorize the 30 second news snippets on this topic as falling into the category of negotiating comments. We do not currently expect a full-blown trade war. However, if wrong and tariffs are implemented around the world it is likely to have a negative impact on global economic growth and thus a negative impact on oil consumption. If so it could then evolve to a strong level of selling pressure hitting the global oil benchmarks.
We view Friday’s relief rally as a bit overdone and are expecting oil prices to recede modestly early in the week as market participants digest and analyze the implication of the production increase.