What's next for crude oil, post-Opec?

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Brent crude oil prices rallied strongly on Friday after Opec and its allies agreed to increase crude oil production in order to bring their collective over-compliance closer to 100%.

This came following months of falling production, primarily due to a continued decline in output from Venezuela. 

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With the cartel and its allies failing to provide a firm number, the market rallied in the belief that the deal would see production rise by no more than 600,000 barrels/day over the coming months. Saudi Arabia, however, set the record straight on Saturday when it signalled a real boost to supply of closer to one million barrels/day.

At the same time, Saudi oil minister Khalid Al-Falih said that the country would do whatever necessary to keep the market in balance. The rise of Brent crude oil to $80/barrel last month triggered a wave of protests from the likes of US president Donald Trump and several emerging market governments worried that rapidly rising oil prices would hurt growth and subsequent demand. 

Politics were never far away at this meeting with Iran and Venezuela balking at the proposal to raise production given that they felt victimised by US sanctions. This was clear on Friday when the Opec President and UAE oil minister Suhail Al Mazrouei struggled to present what was a vaguely worded statement. What matters the most is what the world’s biggest producers say, and with Russia and Saudi Arabia firmly supporting a production increase towards one million b/d, Brent crude has drifted lower today. 

While Brent has responded to the increased supply by drifting lower, WTI crude oil is a different story. During the past few session, WTI’s discount to Brent, the global benchmark, has more than halved. The first part of the move was triggered by the reduced Brent risk premium as the market began pricing in more supply. 

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The latest spike since Friday, however, has primarily been driven by events in North America. The prompt WTI spread between August and September blew out on Friday following an outage at an oil-sands facility in in Canada run by Syncrude. A total production of 350,000 b/d could be impacted until the end of July resulting in fewer barrels being sent south via pipelines to Cushing, the delivery hub for WTI crude oil. 

An accelerated stock decline at Cushing would support prompt spreads by creating a tighter market around this important hub. Even the near $2.5/b premium seen today between August and October has so far done little to attract selling from traders holding physical oil at Cushing...  

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In the short term we are likely to see crude oil being supported by continued geopolitical risks related to supply concerns from Venezuela and particularly Iran as the deadline for the implementation of US sanctions approaches. These concerns may, however, eventually be replaced by a shifting focus towards a continued rise in non-Opec supply and demand growth which may begin to suffer due to a slowdown among EM economies.

Saudi Arabia and Russia seem to have drawn a line at $80/b as the level above where they fear that demand destruction could emerge. On that basis, we maintain the view that Brent crude oil over the coming months will remain rangebound between $71/b and the low $80s before downside price pressure begins to emerge ahead of year-end and into 2019. 

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