DOHA: As Opec announced an oil output increase yesterday of 1m b/d to cap further price gains, Bank of America Merrill Lynch (BofAML) retained its view that Brent will average at $70 in 2018. “Our Brent crude oil price forecast for 2018 remains at $70/bbl, $4 lower that the forward”, BofAML said yesterday.
A group of 24 Opec and non-Opec oil producing countries representing over half of total global oil supplies met in Vienna to discuss the state of the oil market and determine whether additional barrels were needed to balance it over the coming months.
Yesterday, Opec expressed an intention to boost output to reach 100 percent compliance with its target output. Based on May production data, this entails an increase of roughly 700 kb/d.
Additionally, representatives from several member countries cited an aggregate Opec/non-Opec increase of 1 mb/d, which would likely mean a 300kb/d increase from Russia, though final details for non-Opec production are scheduled to be released on Saturday. This aggregate increase differs somewhat from our expectation last week of 1.2mn b/d, but importantly Opec is opting to put more oil in the market in second half of 2018.
“As for 2019, we retain our $90/bbl Q2 target as we see a tight balance throughout next year too. Plus we see the Trump administration taking advantage of any dip in oil prices to put additional pressure on Tehran, likely reducing downside risks to oil prices in the absence of a full blown trade war.
“Near-term, the agreement will also likely flatten Brent term structure of crude oil a bit and, in doing so, could also force a slightly narrower Brent-WTI spread in 3Q18,” BofAML analysts said in a note sent to The Peninsula.
The BofAML noted that reaching consensus has not been easy, as both Iran and Venezuela were initially opposed to an output hike. Also, the effects of renewed US sanctions on Iranian output are still unknown, weighing down on Opec+ negotiations. Meanwhile, trade war effects are also hard to incorporate into demand projections, although we estimate a demand drop of 44,000 b/d for every 1percent drop in global trade.
In any case, Opec+ faces three major challenges ahead: (1) many members are increasingly unable to meet their own supply targets, (2) spare capacity is quickly dwindling due to a lack of new investment, and (3) the global oil market will likely continue to experience a deficit under most scenarios.
Meanwhile, Brent crude oil fell by more than 1 percent yesterday as investors prepared for the extra 1 million barrels per day (bpd) in output to hit the markets after Opec and its partners agreed to raise production.
Despite the increase, which is intended to stop the gap between global supply and demand from becoming too wide, analysts said global oil markets would likely remain relatively tight this year, Reuters reported.
Brent crude futures fell $1.16 to $74.39 a barrel by 1126 GMT, while US light crude was up 16 cents at $68.74 a barrel, supported in part by a Canadian supply outage.
Prices initially jumped after an Opec deal to increase output was announced late last week, as it was not seen boosting supply by as much as some had expected.
Opec and non-Opec partners including Russia have since 2017 cut output by 1.8 million bpd to tighten the market and prop up prices.
