Crude oil fell by one percent on Monday as investors prepared for an extra 1 million barrels per day (bpd) in output to hit the markets after the Organisation of Petroleum Exporting Countries (OPEC) and its partners agreed to raise production to one million barrels per day.
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.
Nigeria’s Minister of State, Petroleum Resources, Ibe Kachikwu in his reaction said the agreement would see OPEC members raise output by at least 700,000 barrels per day.
“OPEC Member Countries have exceeded the required level of conformity that had reached 152 percent in May 2018,” the group said in its official statement. “Accordingly, the Conference hereby decided that countries will strive to adhere to the overall conformity level of OPEC-12, down to 100 percent” beginning on July 1,” Kachikwu said.
Brent crude futures LCOc1 were down 78 cents at $74.78 a barrel while U.S. light crude CLc1 was up 25 cents 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 last weekend, 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 bpd 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 bpd and increase the limits of members with spare capacity by 600,000 bpd – this would enable 100 percent compliance. 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 percent compliance would in theory mean an additional 1.2 million bpd hitting the market, even though this would not be achievable in practice,” said Callum MacPherson, Investec head of commodities.
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 bpd ramp-up in 2H18.
“This is a larger increase than presented Friday although the goal remains to stabilize inventories, not generate a surplus,” Goldman Sachs said in a note on Sunday.
Goldman Sachs also warned that an “outage at Syncrude Canada’s oil sands facility could leave North America short of 360,000 bpd of supply for all of July”.
He added that this would exacerbate the current global deficit, thereby making the increase in OPEC production all the more required.