Brent crude drops 1% as market prepares for higher output
Nonetheless, the global oil market is expected to remain tight this year, analysts say
London — Brent crude oil fell 1% on Monday as investors prepared for an extra 1-million barrels a day 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.
Brent crude futures were down 78c at $74.78 a barrel at 9.17am GMT, while US light crude was up 25c at $68.83 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 barrels a day to tighten the market and prop up prices.
"As yet there is no plan as to how the limits will be reallocated. One simple approach would be to reduce the limits of those not producing enough by 600,000 barrels a day and increase the limits of members with spare capacity by 600,000 barrels a day — this would enable 100% compliance," said Callum MacPherson, Investec head of commodities.
"However, it seems unlikely members like Venezuela would give up unused limits in this way. Instead those unused limits might be left in place, so 100% compliance would in theory mean an additional 1.2-million barrels a day hitting the market, even though this would not be achievable in practice."
Largely because of unplanned disruptions in places like Venezuela and Angola, the group’s output has been below the targeted cuts, which it now says will be reversed by supply increases, especially from Opec leader Saudi Arabia. Analysts warn, however, that there is little spare capacity for large-scale output increases.
After officially meeting on Friday, Opec gave a press conference on Saturday that implied a bigger increase in supply.
"Saturday’s Opec+ press conference provided more clarity on the decision to increase production, with guidance for a full 1-million barrels a day ramp-up in hte second half of 2018," Goldman Sachs said on Sunday.
"This is a larger increase than presented Friday although the goal remains to stabilise inventories, not generate a surplus," the US bank said.
Edward Bell, commodity analyst at Dubai’s Emirates NBD bank, said when the Vienna agreement was priced into the market, he expected prices "in a range between $65-$70 a barrel for Brent for the remainder of the year".
Goldman Sachs also warned that an "outage at Syncrude Canada’s oil sands facility could leave North America short of 360,000 barrels a day of supply for all of July".
It said this "will exacerbate the current global deficit, making the increase in Opec production all the more required".