LONDON: Oil prices jumped yesterday afternoon as OPEC announced a more modest production increase than forecast.
The group said yesterday that it and its allies would from next month bring production back in line with levels originally agreed in late 2016, equivalent to an increase of around 1 million barrels.
But analysts have warned that the reaffirmed commitment — an effective production increase given that a number of producers have cut output more than agreed— would not be enough to lower prices, given further supply disruptions on the horizon.
OPEC Conference President and UAE Energy Minister Suhail Al-Mazrouei told reporters in Vienna that the target was a group-level commitment, and that individual production quotas for member states had not been set.
Adherence to the decision would be “challenging for those countries that are struggling with keeping their level of production,” he said, but he noted that other countries could pick up any shortfall.
“We will deal with it collectively,” he said, insisting that the group would not not exceed production agreements.
“It is difficult already to achieve that 100 percent,” he added. “No one intends to do anything beyond that.”
But Thomas Pugh, a commodities analyst with Capital Economics, said while OPEC currently had little spare capacity, production rebounds by key states might tempt members to over-produce.
“OPEC has found it difficult to police group quotas in the past so today’s decision runs the risk of production rising above its target,” he said.
“If production starts to rebound in Venezuela or Angola then the group may quickly exceed its quota.”
The lack of detail over individual commitments followed disagreements between Iran and Saudi Arabia about the level of increases ahead of the meeting, according to energy expert Cornelia Meyer.
“The ‘collective agreement’ to return to 100 percent compliance was in the end sufficiently fuzzy for them to get an agreement,” she told Arab News.
“But going forward the market is going to want to see more detail as to how it will be implemented — and by whom — before it impacts prices.”
Brent crude futures rose around 3 percent on the news, briefly exceeding $75 per barrel in early afternoon trading, with prices forecast to rise further in the short-term.
“The effective increase in output can easily be absorbed by the market and is not going to tip the oil balance into negative territory,” Harry Tchilinguirian, head of commodities strategy at BNP Paribas, told Reuters.
“I suspect the market will continue to grind higher, notably in view of oil inventories in the OECD being below the famous five-year average target and the ever present risk of supply outages in Venezuela and Libya.
The agreement is likely to do little to mollify those looking for higher output increases to ease pressure on prices, not least US President Donald Trump.
“Hope OPEC will increase output substantially. Need to keep prices down!” Trump tweeted yesterday, following the announcement of the agreement.
But Meyer noted that shifting macroeconomic trends — notably the prospect of growing trade wars between the US and trading partners like China and the EU — may see rising demand for oil slow or go into reverse.
“We’re out of the goldilocks scenario now,” she said.
“Both Saudi Arabia and Russia have talked up how much the market is short. From now on they may well have to talk it down in terms of that gap between supply and demand.”
