What for oil market is waiting after increasing quotas for oil production in OPEC?

The meeting of OPEC on July 20-22 turned out to be rather ambiguous for the oil market, which reacted with a multidirectional dynamics. This is acuted by the fact that OPEC didn’t give a clear answer, how much will be an increase in oil production in OPEC and non-cartel countries.

What was expected from OPEC

After the oil market started talking about oil shortage, and US President D. Trump appealed to OPEC with a demand to increase oil production and review restrictions on its production, the oil quotes turned out to be under considerable pressure of speculation and expectations that OPEC will increase production.

Later, the oil market was expecting an increase in quotas of 1 million barrels per day, and this figure actively fit into the cost of oil. As a result, the main oil brands have renewed the minimum of the last two months.

 

Fig. 1.  BRENT Chart

 

Fig. 2.  WTI Chart

Results of the OPEC meeting

After a three-day meeting between OPEC and non-cartel countries, the increase in quotas for oil production took place, but not as the market expected it.

Instead of the expected growth in oil production of 1 million barrels per day, the production growth will be about 400,000 barrels per day, the Iranian representative said. On the other hand, Nigeria’s oil minister said that production will increase by 700 thousand barrels per day.

The fact is that the increase in oil production will be made in proportion to existing quotas. And because some countries are not able to quickly increase production – it will take some time.

It is also worth noting that the increased volume of 1 million barrels a day falls on all participants in the agreement as part of OPEC, and not included. And since this increase will be allocated according to existing quotas, Venezuela and other countries with low production will receive a part of new quotas, then actual production growth will vary in the range of 500-800 thousand barrels per day over time.

The new increases in production quotas will take effect on July 1, which may cause an excuse for the sale of oil in end of June and start of July.

The outcome

As a result, the oil market laid a much larger volume of oil production, the correction of which was traced on June 22. But the overall downward trend of BRENT has remained, confirming the market’s concerns about the prospects for a new increase in production.

The difference between the cost of brands BRENT and WTI declined, indicating that the conflict over the shortage of raw materials is exhausted.

 

Fig. 3. The difference in the cost of oil BRENT and WTI (BRENT-WTI)

As a result, oil remains near a certain bottom, from which it is possible to repel on renewal of supply and demand. But do not forget why the quotas for oil extraction were adopted. And such an ambiguous decision was taken with the aim of preserving their high cost.

On the other hand, such statements on the growth of the deficit and the increase in quotas in the future can be regarded as much more acute by the market.

Anton Hanzenko

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