Here’s How Easing Of OPEC’s Output Restrictions Will Impact Oil Prices

by Trefis Team
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So far, the year 2018 has been a good one for commodities, particularly crude oil. Thanks to the Organization of Petroleum Exporting Countries’ (OPEC) agreement to restrict their oil output by 1.8 million barrels of oil per day (bpd), crude oil prices rose to $80 per barrel last month for the first time since 2014. While this has helped oil companies across the globe (including US oil giants – Exxon, Chevron, BP) to recoup their losses, major oil producing countries – Saudi Arabia and Russia – are now planning to take advantage of rising oil prices by supplying more oil into the markets.

Accordingly, at the bi-annual meeting in Vienna last week, the oil cartel, along with its Non-OPEC allies, decided to increase its output by 600,000 bpd, six months ahead of the expiration of its existing agreement. This implies that the OPEC will now pump more oil in the coming months, which is likely to pull down the oil prices in the near term.

As per the new deal, the OPEC will increase about 1 million bpd of oil into the markets, although most of the member countries are currently not in a position to ramp up their output immediately. Consequently, the overall increase in the OPEC oil supply that will reach the markets is estimated to be around 600,000 kbpd. However, the market had anticipated a higher rise in supply from the cartel. As a result, the OPEC’s expected output rise has led to an initial increase in the oil prices, instead of a drop. The international oil benchmark Brent surged to $75.55 per barrel, representing a rise of 3.4% on Friday, when the cartel announced its decision. We believe that the investors have over-reacted to the move, which has resulted in a rise in oil prices. Once the OPEC supply comes into the market, the surplus in the market will grow, causing the oil prices to decline.

Based on the OPEC’s previous agreement which was expected to last until the end of 2018, we had built an interactive dashboard predicting our base forecast (grey bars) for Brent oil prices for 2018. Our base case assumed that the OPEC and its allies will continue to restrict their output by 1.8 Mbpd until the end of this year to further support oil prices. This case also factored in a lower oil output from Iran and Venezuela in 2018, due to the US sanctions on the former and the ongoing financial unrest in the latter. In this case, we had estimated Brent oil prices to average at around $70 per barrel for 2018.

However, with the easing off in the OPEC production cuts, we present our revised oil price forecast below (blue bars). In this scenario, the OPEC and Non-OPEC nations, mostly Saudi Arabia and Russia, will increase their oil production by 600,000 bpd in the coming months. This increased output in the already oversupplied oil markets is likely to pull down the current oil prices. Consequently, we have revised our estimate for Brent oil price to $67 per barrel for 2018.  The year-to-date average price for Brent oil is close to $70 per barrel.

Do not agree with our forecast? Create your own oil price forecast by changing the base inputs (blue dots) on our interactive dashboard.

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