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Higher production to weigh on oil prices, say analysts

OPEC

Higher crude oil production by the Organisation of the Petroleum Exporting Countries and its allies will weigh on prices, analysts at Capital Economics, a London-based economic research firm, have said.

They said the OPEC+ agreement, signed on Sunday, should help to stabilise oil prices. Brent crude is expected to trade in a narrow band of between $70 and 75 per barrel over next six months.

“But we expect Brent to fall into the $60-70 range in 2022 as more global supply comes onto the market,” the Assistant Commodities Economist, Samuel Burman, said in a note.

The analysts noted that the UAE repeatedly blocked the Russia-Saudi plan put forward at the OPEC+ meeting earlier this month to gradually increase output quotas on the grounds that it wanted a higher production baseline.

The group agreed on Sunday to increase its collective production quota by 400,000 barrels per day each month between August and December 2021.

Burman said, “This should help keep OPEC+ oil supply relatively constrained and, in conjunction with the gradual recovery in global oil demand, should be enough to keep the global oil market in a deficit for at least the next few months.

“In turn, this will maintain the downward pressure on global stocks and provide support to prices, particularly in Q3.

“Admittedly, we expect some OPEC+ member states to overproduce relative to their new quotas, incentivised by high spot prices, but the group’s overall output is likely to remain fairly constrained as export opportunities are still fairly limited.”

He said if anything, the gradual rise in output quotas could be temporarily postponed at some point, like it was earlier this year, if the spread of the COVID-19 Delta variant kept transport-related demand stuck in the doldrums.

The analysts noted that the second phase of the deal involved unwinding all of the existing production cuts by the end of September 2022.

Burman said, “We expect that this recovery in OPEC+ supply will help the global market swing into a surplus in the early part of 2022.

“What’s more, Saudi Arabia, Russia, the UAE, Kuwait and Iraq will all receive higher production baselines from May 2022 and this should allow their production to quickly return to pre-virus levels, thereby boosting the market surplus and putting a lid on prices.”

According to the analysts, the third phase of the agreement starts from October 2022 and lasts until the end of the 2022 and it is essentially an implicit agreement by each member state to agree not to produce at capacity once the production cuts have been fully reversed.

They said some OPEC+ member states, such as the UAE and Saudi Arabia, would still have production baselines significantly below their capacity levels during this time.

They said, “In theory, this reduces the risk of prices crashing by limiting production increases, but we still expect member states to gradually produce more as there is little to prevent them from doing so.

“All told, we forecast that the price of Brent will hover around current levels of $70-75 per barrel for the remainder of this year as OPEC+ keeps a lid on its oil supply.”

However, they expected the price would fall to $60 by the end of 2022 as supply flood the market, they added.

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