EMEA News
Crude Jumps on What Critics Call An Inadequate Agreement by OPEC to Hike Output
As predicted, the Organization of the Petroleum Exporting Countries (OPEC) on Friday kicked off its Vienna summit by announcing a moderate rise in output to compensate for shortages from Venezuela and Iran - and the market reacted accordingly, with a spectacular leap in West Texas Intermediate by $3.04 to $68.58 and a surge in Brent of $2.50 to $75.55 per barrel.
The WTI gains were the biggest daily jump since November of 2016 - but one media source wondered why oil would jump so high given that the output rise announced will reportedly be easily-absorbed, while others questioned how OPEC, most of whose members any of whose members have no spare capacity, could achieve the hike.
OPEC launched its summit by agreeing not end its 18-month-old deal to limit output but instead cut no deeper than 1.2 million bpd, the target they set in November 2016, and return to 100 percent compliance on July 1 (previously its compliance rate was over 150 percent, meaning it was cutting about 600,000 bpd more than intended).
Prior to settling on this course of action, the cartel (according to sources) was hoping to restore about 1 million barrels per day (bpd) to the market - and this figure has been widely reported as by how much production will rise in the near future.
The Financial Post, with a headline stating in part, "So why is oil up by $3?", interpreted the day's events to mean that the $1 million increase would only be nominal and that in reality only 700,000 bpd would be added to the market for the remainder of 2018, due to many members not being able to boost production.
Although the deal was described by Suhail Al Mazrouei, who is OPEC's president and energy minister for the United Arab Emirates, as "a testimony that we care about the consuming countries," the Post noted that "the final communique from the group's meeting in Vienna left many unanswered questions about how the oil will flow to consumers."
As if to answer the question posed in the Post's headline, John Kilduff, founding partner at Again Capital, remarked that the lack of clarity in the official statement was boosting crude futures; he also said, "They definitely came up short, relative to expectations: a headline touting ... 1 million barrels of additional output would have made a difference."
Industry insiders were mainly united in their view that OPEC had underdelivered and that a rise short of 1 million bpd would do little to correct a perceived tightening global market: Nitesh Shah, director, research, at Wisdomtree, said, "All they agreed to was to get back to 100 percent compliance at the group level....that barely moves the mark on aggregate OPEC levels of production.
"Oil markets should remain tight as a result."
Gary Ross, head of global oil analytics for S&P Global, said the hike will be enough for now "but not enough for Q4 to address a decline in Iranian and Venezuelan exports."
As for how crude prices will fare, Ole Hansen, senior manager, Saxo Bank, remarked, "In the short term we are likely to see crude oil being supported by continued geopolitical risks related to supply concerns from Venezuela and not least Iran as the deadline for the implementation of U.S. sanctions approaches.
"These concerns may, however, eventually be replaced by a shifting focus toward a continued rise in non-OPEC supply and not least demand growth, which may begin to suffer due to a slowdown among emerging market economies."
If nothing else, the quick decision to boost production was presumably a humiliation to Iran, whose energy minister on Thursday evening was reportedly seen storming through the lobby of the Palais Hansen Kempinski, vowing that OPEC would not reach an agreement because too many members opposed the idea of relaxing crude restrictions.
