A key week for “Black Gold” as the OPEC oil cartel meets in Vienna

20 June 2018

In recent months, the attention of market watchers has ricocheted between fears of a global trade war, the election of a populist Government in Italy and the prospect of the gradual central bank tightening across the globe. But could this week’s meeting of OPEC, the oil cartel in Vienna, result in a ramping up of supply that might have a profound impact on prices? Energy prices matter, as a key input into inflation, but they also have a particularly notable effect on the UK stock market as the oil and gas sector represents 14% of the FTSE All Share Index.

Andrew Ramsbottom, Research Director at Tilney, comments: “The members of OPEC, and their associates, in particular Russia, must be pleased with the transformation in the oil market, over the last 18 months. In January 2017, they implemented a 1.8m barrels per day cut in collective output in order to bolster the languishing oil price. Strong compliance to the new regime and greater than anticipated global demand has allowed the oil price to steadily recover from the $50 per barrel it was languishing at 12 months ago.

"More recently, the prospect of US sanctions on Iran from November and production problems for some OPEC members, most notably Venezuela, have pushed the price of Brent crude above the $70 per barrel level, which is supported by the market’s underlying fundamentals. However, US shale output does not offer any spare capacity and so Saudi Arabia and Russia are the de facto swing producers.

“Under pressure from Donald Trump, Saudi Arabia recently initiated discussions with Russia to take the current momentum out of the oil market, by starting to reduce the output cut. Adding more spice to the mix, President Putin and Prince Mohammed Bin Salman met after last Thursday’s World Cup opening match between the two countries where the body language was very much one of an agreement in principle to boost production. Saudi Arabia will now take this proposal to the OPEC, and associates, meeting in Vienna, on Friday.

“However, they are likely to meet with resistance, for a number of reasons. Many OPEC members e.g. Iran and Venezuela are victims of Trump’s recent actions and so will be reluctant to bail him out of the consequences. Spare capacity amongst the wider group of members is limited, so they will not be able to pump more oil in order to compensate for a lower price. Hence, the meeting could be a difficult one. Recently the output of both Saudi Arabia and Russia has started to creep up, in anticipation of reduced restrictions. Russia is particularly keen to increase output.

“Many observers see a parallel with 2011 when the oil price reached $120 per barrel. Saudi Arabia tried to get an agreement to increase OPEC output to curb this excessive price strength, but failed. It raised production anyway causing OPEC to fracture and heralding a free for all dash for market share which drove the oil price down to below $40 per barrel in early 2016.”


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