Bearish oil seen ahead of OPEC meeting

Production deal seen collapsing

OPEC is meeting on Friday 22 June with non-OPEC countries, including Russia, joining them on the Saturday. Back in January 2017, Russia and Saudi Arabia agreed to curb global output by 1.8 million barrels a day to stem the slump in oil prices. The two countries produce around a fifth of world output.

Gaurav Sharma, independent oil analyst and Forbes columnist, is expecting the oil cartel’s discipline to break at this meeting. New pressures are the involvement of Saudi Arabia and Iran on opposite sides in the fighting in Yemen, and US President Donald Trump tweeting about OPEC ‘artificially’ boosting oil prices. Oil prices climbed above $80 last month after the US withdrew from the nuclear deal with Iran.

Iran, the world’s third largest crude producer, has reportedly said that Venezuela and Iraq will join it in blocking a Saudi/Russia proposal to raise oil production. The risk is that Saudi Arabia will choose to go it alone, boosting output. Sharma expects output to climb whatever OPEC agrees.

Time to return barrels to the market

Russia will not mind the disharmony, Sharma believes, as the Kremlin think the time is right to increase output.

Sharma noted that Alexander Novak, Russia’s energy minister, has said oil inventories have come down to their five year average, and therefore it is about time to return some of the barrels that have been taken out of the market.

Sharma asks how long could this deal have lasted. While the signatories to the production deal have remained very disciplined, abiding by the cuts, the big players (Saudi Arabia and Russia) are very oil-centric economies and as a result they need to bring their produce to the market or risk losing market share.

Sharma thinks the production increase could be between 450,000 and 600,000 barrels per day. Currently across the globe production is around one 1.2 million barrels above the 99.2 million required every day. He believes a $100 dollar barrel was always unlikely, as US shale production was a buffer for any shortfall in light sweet to the Far East. 

Sharma sees Brent at $65-$70 a barrel

Crude’s rally during April and May was mainly in the short term contracts, Sharma says, while the six-month future remains in backwardation (where the spot price is higher than the future). This suggests the market did not expect prices to remain high for long. He sees this week being negative for crude, and Brent settling between $65-$70 a barrel on average for 2018, with West Texas Intermediate (WTI) at $60-$65. The prices respectively are $75 and $65 ( as of 19 June).