OPEC says the recent oil rally that saw prices close in on $80/barrel is a short-term spike mostly due to geopolitics, more than a supply shortage. Getty Images photo by Akos Stiller.
Oil rally not sufficient grounds for OPEC to boost production
The recent oil rally, where crude prices neared $80, is seen by the Organization of Petroleum Exporting Countries as being driven by geopolitics instead of a shortage in supply.
As such, four OPEC delegates say the cartel is not rethinking its 2017 supply cut agreement that has seen participants in the pact cut their overall production by at least 1.8 million barrels per day (b/d), or almost 2 per cent of world supply.
OPEC kingpin Saudi Arabia says the recent oil rally is brief and speculator-driven and is not sufficient grounds for members to boost their output, according to a Reuters’ source familiar with the kingdom.
The source told Reuters that data showing an impact on oil prices was supply-driven would need to be seen.
Instead, the OPEC delegates say the latest boost in oil prices is mostly due to concerns about the Trump administration’s decision to abandon the Iran sanctions relief agreement as well as escalating friction in the Middle East.
“Prices are high just because of the tensions,” one of the OPEC delegates, who declined to be identified, told Reuters.
Since the OPEC supply cut deal began, oil prices have risen about 40 per cent. By 2:53 p.m., EDT Thursday, benchmark Brent crude was up 11 cents to $79.39/barrel.
Reuters reports that some in OPEC say the oil rally could continue even more before prices begin to deflate.
“It may exceed $80 and then go down,” one of the sources told Reuters. Another delegate said the extent of the rally has yet to cause any real concern, “Not yet”.
OPEC ministers will meet on June 22-23 to review the supply agreement which has reduced oil inventories to the five-year average, the goal of the pact. However, OPEC ministers have also said that other metrics should be considered, including oil industry investment. This suggests the cartel is not in a rush to wind down the successful supply cuts.
However, the steep production losses suffered by the Venezuelan oil industry due to an economic crisis in the South American country is of concern to OPEC delegates.
Partly as a result of Venezuela’s output declines, OPEC has over-delivered on its supply cut.
Moving forward, OPEC says it has no official target for oil prices, however, Saudi Arabia has said to fund its economic reforms and sweeten the proposed IPO of Saudi Aramco, the kingdom would be pleased if oil prices rose to $80/barrel or even $100/barrel.
Iran disagrees. Tehran says it wants lower oil prices that Saudi Arabia’s goals and that OPEC should look for $60/barrel prices to rein in US shale oil expansion.
“When oil prices rise due to geopolitical concern and not due to demand and supply and fundamentals, it cannot be reasonable,” a Reuters source familiar with Iranian thinking said of the current rally.