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Oil in Global Economy Series: will OPEC ease production caps this week?

Two questions are on every oil traders’ mind this week; will the OPEC led pact will ease the production cap at this week’s meeting that has been in place since January last year and will not expire until the end of 2018 and if so, by how much?

OPEC will ease caps:

The answer to the first question is very likely to be yes. OPEC led pact will ease production cap this week, despite the ‘no’ group suggesting that Saudi Arabia needs higher oil price for a successful Aramco IPO. Two of the major producers; Russia and Saudi Arabia both have signaled production easing. Saudi Arabia will ease production caps because,

  • Saudi Arabia wouldn’t want a higher price to destroy the healthy demand growth which reached 1.6 million barrels per day in 2017 and there are signs that higher price is weighing on demand.
  • Saudi Arabia wouldn’t want higher oil price to provide overly incentives to shale oil producers in the United States, who has been increasing production at an unanticipated rate. U.S. oil production has reached a new record high of 10.9 million barrels per day this month.
  • Higher oil price provides incentives to alternative energy producers.
  • With oil production dwindling in countries like Nigeria, Libya, and Venezuela, a production cap increase not necessarily will lead to equivalent production increase from OPEC.
  • Looming Iran sanctions should provide cover if the cap increase leads to lower oil price.
  • Big importers like India urged Saudi Arabia to take actions.

And Russia has been wanting to increase production by quite some time now, with Russian energy minister Alexander Novak expressing dissatisfaction of the fact that limiting Russia’s production is hurting investments in the sector.

Easing won’t exceed 50 percent:

The answer to the second question is difficult. It is next to impossible to predict the exact amount of ease before the meeting. However, we don’t expect the cap to increase by more than a million barrels per day since the original suggestions were around that number.

As a matter of fact, we at FxWirePro believe that the cap increase would not exceed 50 percent of the original ceiling of 1.6 million barrels per day, as a hint of further considerations at next meeting likely. OPEC would like to keep some ability to maneuver the market at a later date and it is very difficult to increase the cap once reduced.

We also don’t expect the amount to be less than half a million barrels per day. If OPEC eases cap by half a million barrels per day, the oil price could move up in the short-term but not necessarily turn bullish and immediately resume the bull trend of 2016/18.

 

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