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Why have prices risen after the OPEC meeting?

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The opening session of the 174th OPEC meeting yesterday in Vienna

Vienna – The Organisation of Petroleum Exporting Countries (OPEC) has announced yesterday that they will ease their production cuts to achieve a 100% compliance of the 1.2 mbbl cuts agreed in 2016 between the OPEC member states. Markets have not reacted as expected to this announcement causing the WTI to rise to nearly $69 and Brent to reach close to $76.

President Trump has reacted to the decision tweeting that “Hope OPEC will increase output substantially. Need to keep prices down!” His tweet suggests that the ease on production announced by OPEC should enable significant supplies to come to the market to effectively show an effect on reducing gasoline prices.

OPEC has repeatedly stated that it is an independent sovereign organisation, and it listens to its customers and it takes their views on-board. “OPEC is an economic organisation, not a political organisation. We act based market fundamentals” Said Suhail Almazroui, UAE Energy Minister who is currently the President the OPEC conference.

Although the decision announced yesterday does not show a clear signal of increasing production, a major reason why prices kept going high, its impact could be felt on the long run as more supplies start to enter the markets in the coming months. Another reason why prices kept increasing is the fact that the meeting between OPEC-non-OPEC is still to be held this afternoon in Vienna, which is expected to have a similar decision on easing production cuts to achieve 100% compliance from non-OPEC cuts coming mainly from Russia.

Easing production cuts to achieve 100% compliance would indirectly mean increasing production by around 600 tbbl, as current compliance rate is around 150%. Furthermore, the concerns over the OPEC spare capacity has been a major concern for oil traders.

Apart from easing production cuts, OPEC has focused on institutionalising its cooperation with non-OPEC countries entering into an agreement back in 2016 which has enabled the organisation to restore market stability and supply and demand balance.

What’s expected to come out from today’s meeting should reflect on enhancing market conditions, stability and achieving the supply and demand balance sought by consumers and producers.

Categories: Featured, Oil, UCERGY Insight