Oil prices might return to $60 against background of OPEC+ increasing production

Business & Economy May 29, 2018, 4:41

As of April, OPEC+ countries cut production by 2.7 mln barrels per day with a quota of 1.8 mln barrels against the level of October 2016

MOSCOW, May 29. /TASS/. The OPEC+ countries will try to keep the deal on limiting production until the end of the year, despite the stated intentions to ease the current restrictions. The market has already partially played up statements about the upcoming production growth, according to analysts. However, they do not rule out that oil this year may still drop to $60 per barrel.

After the statement made by the US President Donald Trump about the US withdrawal from the nuclear deal with Iran on May 8, Saudi Energy Minister Khalid Al-Falih said in Twitter the country was ready to recover the volumes of oil that might disappear from the market if sanctions are implemented.

At the St. Petersburg Economic Forum, Al-Falih and his Russian counterpart Alexander Novak discussed the question of how much production can be raised, although they did not name the figures. According to sources of Reuters and TASS, the ministers discussed a gradual increase in production by 1 mln barrels per day.

As of April, OPEC+ countries cut production by 2.7 mln barrels per day with a quota of 1.8 mln barrels against the level of October 2016. The deal is overfulfilled in large part due to a strong decline of production in Venezuela, which instead of the promised 100,000 barrels cut production due to the economic crisis by 650,000 per day.

Softening the restrictions has yet to be discussed with other OPEC+ countries, the issue will be considered at a scheduled meeting in Vienna on June 22-23. So far, the leaders of the agreement only promised that the softening of quotas will be smooth, in order "not to cause shocks in the market." Immediately after the statements oil prices reacted by losing 2.5% and dropping below $77 per barrel. During the trading session opened on Monday on the Moscow Exchange, Brent oil fell below $75 per barrel.

However, according to analysts, full withdrawal from the agreement is out of the question. "Rather, it is a work on reformatting it - adapting it to changing market conditions," research director at Vygon Consulting Maria Belova said.

"It is hardly necessary to expect an official return to the policy of unrestrained production growth, like in 2015," Director at Corporates department at Fitch Dmitry Marinchenko said. According to him, in one form or another, the deal is likely to be maintained - the participants will gradually raise quotas.

In general, experts agree that Russia and Saudi Arabia will be able to increase production in two to three months. During this period, OPEC's capacity of 3.4 mln barrels per day, freed from the agreement, can be filled, Belova said. At the time the agreement started, it were estimated at 2.2 mln barrels per day.

"Saudi Arabia and Russia have generally prepared the market for a possible decision to gradually increase production, so prices should not react excessively when and if such a decision is made," Marinchenko added. In his opinion, decline of prices below $60 per barrel this year is unlikely.

Iran, according to Marinchenko, will not be able to block OPEC+ decision to increase production, Marinchenko said. Saudi Arabia and Russia want to preserve formal agreements and, most likely, try to persuade Iran, he said. "In particular, they can promise assistance in circumventing American restrictions," Marinchenko added.

The main issue, according to analysts, remains how other parties to the agreement will react to the change in the policy. "We cannot rule out that they will begin to treat the agreement less seriously," Marinchenko said.

"The situation can spur other market participants, for example, Iraq, to increase production more freely, which can even push prices up even more," expert at the energy center of the Skolkovo business school Ekaterina Grushevenko said.

According to Belova, taking into account the current forecasts for demand and supply for the second half of the year, as well as the factor of Venezuela and Iran, the alliance would optimally increase production by 300,000 barrels per day, with further growth until the end of the year.

Marinchenko recalled, "There are many factors over which OPEC+ has no power - geopolitical tensions, demand and shale oil.".

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