Oil at US$80 a barrel raises prospect of global supply increase, reckons Commerzbank

The market can expect an increase in global supply to ease tightness and higher prices..
On Friday, Brent above US$77 with WTI over US$69 a barrel

There’s a growing sense of urgency and uncertainty in the market as stocks tighten, the geopolitical climate worsens, and inflation is back on the economic agenda.

OPEC and friends have pleased the market in the past two years, but the talk now is shifting back to balancing supply so as to stabilise the price.

In Friday trading, Brent crude was priced above US$77 with WTI (West Texas Intermediate) holding above US$69 a barrel.

Energy ministers out in force..

Energy ministers and CEOs were out in force in Saint Petersburg this week at the annual international economic forum, SPIEF, as the oil price and its impact on the global economy was a headline topic.

As expected, the Russian energy minister, Alexander Novak met with several ministers in recent days, including the OPEC President and UAE energy minister, Suhail Al Mazrouei and the Saudi Arabian minister, Khalid Al Falih to discuss the situation.

News agencies are reporting that the conversation about an increase of up to a million barrels a day is being considered, but speaking at the Forum, Al-Falih said that “all options are on the table".

He added that there was “likely to be a gradual oil supply boost in second half,” as the global economy and anxiety of consumers “is a concern” to OPEC.

Obviously making no more definite comment, he added that all this will be decided at the late June OPEC meeting.

At the last OPEC meeting, ministers were adamant that the agreement would stay in place until the end of 2018 as agreed, but that was before Venezuela’s production decreased so rapidly and the US sanction action on Iran is already taking barrels off the market.

With such tightness in the market, Commerzbank said oil at US$80 a barrel would “raise the probability of a production increase,” to ease the price.

OPEC Secretary General Mohammad Barkindo joined key energy players on a panel in St. Petersburg and said “the implementation of the supply adjustments from 2017 to date has put any doubt to rest, not only of the OPEC member countries,” demonstrating the strength of the “impressive level of conformity” to help balance the market.

The OPEC, non-OPEC cooperation may not be needed for the second half of the year as ministers look at the possibility of adding more barrels to the market.

First time since 2016..

This will be the first time since 2016 when supply will be increased. How this will be implemented will now be the topic of discussion in coming weeks, but it looks clear that key OPEC figures are responding to growing consumer pains of high prices, strong demand for the remainder of the year and the reality of less oil from Venezuela and Iran.

Ministers had talked about forming a long term alliance of the 24 countries and possibly others, but their cooperation in recent years shows a willingness to act in unison when the market demands.

Al Falih stressed that any release would “be gradual” so as not to shock the market, but with four weeks until any definite decision, many analysts are arguing that the market will be ready for the increase.

Looking at global economic growth with a knock on impact on energy demand, all indications are positive, although Al- Falih estimates that oil demand growth would be curtailed at around 1.5 million barrels a day in 2019.

To meet that growth, at least in the short term, analysts agree that adding more oil to the market is the right thing to do.

The president of Prestige Economics, Jason Schenker says, “oil prices are being supported by the prospects of a very strong imminent driving season,” and says this demand could keep the price high.

Other upside risks he sees are “the US unilateral withdrawal of the Iranian nuclear agreement” as well as an increase in trade, “following this weekend’s statement about a potential US-Chinese trade détente.”

As energy ministers return home, the new focus for the coming weeks is clear.

The market can expect an increase in global supply to ease tightness and higher prices, but strong economic demand expectations for the rest of the year is good news for everyone.

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