The recent meeting between OPEC and its allies ended with the announcement of a production increase. This will mark a first since reaching the agreement to stabilize the oil market in 2016. Although the number of oil barrels that will enter the market has not been specified, it is estimated at around one million.
Oil prices have stood at around $75 during the two weeks leading to the producers’ meeting. Despite the production increase, prices have not fluctuated, as investors were expecting a similar agreement regarding the output. On the other hand, the tension rose with the announcement of new U.S. sanctions against Iran.
OPEC production increase
OPEC members, especially Saudi Arabia, have an overall capacity estimated at 3.4 million barrels per day in its inactive fields. This figure could be increased in emergency situations, according to the International Energy Agency.
Said reserves will be reduced as the group implements the new production rise by one million barrels, agreed last week in Vienna. Saudi Arabia plans to raise output to a record 10.8 million barrels per day next month. This would consume about 40 percent of its idle capacity, leaving a buffer of just 2.6 percent of global the supply.
This would limit the OPEC’s capacity to react to further supply disruptions. Venezuela’s production is expected to drop even more as its economic crisis worsens. Early this month, Libya’s output unexpectedly fell by 400,000 barrels per day. The drop came after a militia attacked two of its main oil terminals. As a result, another armed group took control of part of the country’s industry.
Now, Washington’s push to stop its allies from purchasing Iranian crude by November could get another 1.5 million bpd out of the market.
Venezuela represents the greatest risk for supply. The country’s output has already plummeted by 40 percent since 2015. This is mainly due to an ongoing recession, civil disorder, and the exodus of PDVSA workers. The production rise pledged by the OPEC and its allies last week is meant to compensate for these drops. However, the gap it is meant to cover will grow again. Especially once the U.S. sanctions against Iran take effect in November.
Early this month, the IEA stated that Venezuelan and Iranian production could still fall by 30 percent or 1.5 million bpd by the end of the year. This was before the U.S. announced restrictions to Iranian exports, which were stricter than analysts had expected.
The top investment banks forecast that Brent crude will stand at $85-$90 on the second semester of 2019. The banks see the limited additional production as the reason for this rise.
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