Small output rise from OPEC could boost prices: Experts

By Ovunc Kutlu

NEW YORK (AA) – Crude oil prices could rally in the medium term if the Organization of Petroleum Exporting Countries (OPEC) and Russia agree to increase their total output less than expected during this week’s much-anticipated meeting, experts told Anadolu Agency on Wednesday.

Saudi-led OPEC and 12 non-OPEC countries under Russia’s leadership will meet Friday in Vienna to decide whether to increase their production levels.

OPEC and non-OPEC oil producers agreed in late 2016 to cut their output in order to trim a supply glut in the global market. They began implementing the agreement in January 2017 and later extended it until the end of this year.

But with crude prices climbing as much as $80 a barrel in mid-May, both Saudi Arabia and Russia want to boost their output to take advantage of high oil prices, which are crucial for their economies.

"Every indication that we see is that we are going to see an increase. The Saudis and Russians are already gearing up. But the question is by how much?" said senior market analyst Phil Flynn from Chicago-based futures brokerage Price Futures Group.

"If you look at the market, when Saudi Arabia and Russia first signaled they were going to raise production by 1 million barrels per day [bpd], oil broke hard after Memorial Day in the U.S.," he added.

Last week, Russian Energy Minister Alexander Novak said his country supports a total production increase of 1.5 million bpd, while reports said Monday that some OPEC countries would prefer raising the total output by somewhere between 300,000 and 600,000 bpd.

"The main question is whether the production increase will be close to 1.5 million bpd or 500,000 bpd or less," said Riccardo Fabiani, a geopolitical analyst at London-based energy market consultancy Energy Aspects.

"If the production increase is close to 1 million bpd, that will be bearish for prices," he said, adding: "If it is 500,000 bpd or less, markets will quickly process the decision, and in a few weeks’ time, fundamentals will kick in and prices will increase."

-Market response

Flynn said the market has already priced in the possibility of a 1.5 million bpd increase more or less, but if the output increase is less than this level, oil prices will rise in the following weeks.

"We will see a production increase, and the market is probably going to initially sell off slightly. But then the market is going to rebound because it's already been priced into the market, and the market is going to say, ‘What are you going to do for next week, or the next quarter?’" he said.

Flynn said there will be some resistance from a number of OPEC countries such as Venezuela, Iran and Iraq, who do not want the cartel to raise production.

"I think, in a show of unity, the production increase is going to be less than 1.5 million bpd. I think the increase is going to be agreed to the original 1 million bpd, which is more than priced into the market," he said.

Fabiani said a lot of the final decision in Friday's meeting will be based on "compromise and consensus between Saudi Arabia and Russia".

"This is going to be a political decision at the end of the day," he said.

Flynn, however, emphasized another issue -- spare capacity -- given that global demand for crude is expected to increase in the summer.

"If we see a production increase of 1 million bpd of oil, how much spare production capacity can we bring in a short period of time? And the answer is not that much," he said.

"If you look at global demand compared to supply, the spare capacity might be down to 2 [million] or 1.5 million bpd that you can bring on quickly. Every barrel that they [OPEC and Russia] increase will be one less barrel of spare capacity in the globe," he said.

"There is a real concern that if OPEC raises production, then it cuts the legs under spare production capacity, leaving the market possibility that prices will go up," he added.

Rising crude oil production in the U.S. may not come to help the global oil market quickly, especially due to a lack of infrastructure for exports.

The oil-rich Permian Basin in west Texas is booming in oil production, but additional pipeline capacity is lagging behind.

"The problem is bottlenecks are real until we bring some more pipeline capacity, or the ability to get more tanker trucks," Flynn said.

"The ability to get oil out of the Permian Basin is becoming more and more limited. There's going to be logistical issues that are going to top that production growth," he said.