The Bullish Truth Of OPEC’s Agreement

June 26, 2018: The Bullish Truth Of OPEC’s Agreement

oil rig

Oil prices jumped 5 percent on Friday after the OPEC+ group announced its vague decision to maintain its collective target while lifting country-specific limits on oil production. The result was viewed as only a modest increase, which could lead to tighter supplies.

Over the weekend, Saudi officials sought to clarify, adding that the move would lead to the increase of 1 million barrels per day. That caused prices to fall back a bit on Monday.

“There’s still some uncertainty in the market as far as how everything is going to start to unwind,” Mark Watkins of U.S. Bank Wealth Management told Bloomberg. “Ahead of that, a lot of people were thinking the worst case scenario as far as OPEC’s going to open up the spigots and oil is going to flood the market again.”

However, the assumption that OPEC is going to flood the market made no sense to begin with, and the result should not be read as a bearish result. OPEC is not going to open the spigot, and if anything, the risk to oil prices is decidedly on the upside. Most OPEC members cannot increase output, even if they wanted to. The oil market may only see 600,000 bpd of extra supply.

That will have only a marginal impact on the market, amounting to less than 1 percent of supply. It would simply offset the declines from Venezuela over the past year. But the declines from Venezuela are not stopping there. They are set to continue, perhaps at an accelerating rate. And they are not the only ones seeing sudden disruptions in supply. Libya temporarily lost 450,000 bpd over the last two weeks and Nigeria is also suffering from lower exports because of pipeline issues.

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