ETF Securities Research Blog

OPEC-rally likely to be short-lived

OPEC together with its non-OPEC partners today decided to extend their production curbs to the end of 2018. With only luke-warm support from Russia heading into the meeting, doubts had formed earlier in the week as to whether the cartel will be able to pull it off.

Oil prices rallied today on the news, but we expect prices to retreat. At current prices, US production will continue to expand, placing downward pressure on both WTI and Brent benchmarks.

At the current pace of expansion in the US, the global supply deficit will be short-lived. We could get back to a production surplus by Q1 2018. Russia’s main concern is that propping up prices through the production curbs has allowed US production to rise with vigour. The US is simply taking market share at the cost of OPEC and it partner countries. That is why Russia was keen to open discussions about an exit strategy.

Inserted into the new agreement is an option to review the current deal in June 2018 in light of prevailing supply and demand conditions. This potentially weakens the deal and we believe will become a source of volatility as the market speculates whether the adjustments will end prematurely in June.

Nigeria and Libya have been pulled into the deal, capping their output at 2017 levels (although no actual figure has been announced). They had previously been exempt given the scale of lost production due to attack-related outages.

With Brent oil trading close to US$64/bbl, we believe that compliance levels could slip once again as it becomes tempting to produce that little bit more at higher prices. We believe markets will be disappointed with compliance levels in coming months after very restrained production in October.

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