OPEC deal could be extended if market not rebalanced by year-end

Baku, Azerbaijan, May 21

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The OPEC deal on oil production cuts may be extended beyond 2018 if the participating countries consider that the market has not yet been rebalanced, Head of Economic Research at Sogefi Group and expert in energy policy Luis Colasante said in an interview with Azernews.

He was commenting on whether the Organization of the Petroleum Exporting Countries (OPEC) chooses to continue with the same strategy fixed at the end of 2016 following the expiration of the current agreement.

“OPEC is not feeling pressure to start winding down the production cuts despite oil prices continue their strong rally with a crude oil price of Brent above $80 a barrel,” he said.

OPEC sees the price spike as a short-term change driven by geopolitical concerns rather than the fundamentals of a much tighter oil market, according to the expert.

The geopolitics has taken over the oil market, pushing crude oil prices up to three-year highs, he noted.

“The market price will continue to increase if Venezuela production continues to collapse. In two years the country’s production decreased from 2.4 to 1.4 million barrels per day, due to poor management of Venezuela's state oil company PDVSA combined with U.S sanctions and legal actions from some oil and gas companies as ConocoPhillips which presses forward on recouping $2 billion from Venezuela,” Colasante added.

The expert’s forecast for Venezuelan production is 1 - 1.2 million barrels per day at the end of 2018 and 900,000 - for 2019.

“With this scenario, the OPEC members will not have to make a significant effort to cut production, because due to production loss in Venezuela and Iran, after U.S. President Donald Trump pulled out of the global nuclear accord with the country last week, the crude oil price will continue to increase, perhaps, hitting the $90 a barrel in the coming months,” he said.

All OPEC members are satisfied with the benefits of higher crude prices, according to the expert.

“In my updated forecast, I calculated that Iran could decrease its production to 560,000 – 700,000 barrels per day at the end of 2018. Iranian government was asking Chinese oil traders to maintain imports after U.S. sanctions,” he added.

Until today Saudi Arabia, Russia, and the United Arab Emirates haven’t increased their production in response to Venezuela’s collapsing output, because they prefer crude oil prices to be kept at a high level, Colasante noted.

In addition, Saudi Arabia, OPEC’s largest oil producer, will continue to push the oil prices to a level of $90-100 a barrel, according to the expert.

He named two reasons for that: first, the country wants to increase the value of a possible IPO and, secondly, to balance its budget.

Currently, Saudi Arabia is looking to raise $100 billion either later this year or in early 2019 by selling 5 percent of the state energy giant, Saudi Aramco, which is believed to be worth $2 trillion.

OPEC and non-OPEC producers reached an agreement in December 2016 to curtail oil output jointly and ease a global glut after more than two years of low prices. OPEC agreed to slash the output by 1.2 million barrels per day from January 1.

Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce output by 558,000 barrels per day starting from January 1, 2017.

OPEC and its partners decided to extend its production cuts till the end of 2018 in Vienna on November 30, as the oil cartel and its allies step up their attempt to end a three-year supply glut that has savaged crude prices and the global energy industry.

Meanwhile, the prices for “black gold” hit $80 a barrel on Thursday, May 17, for the first time since November 2014 on concerns Iranian exports could fall, reducing supply in an already tightening market.

On May 18, the price of a barrel of Azeri Light crude oil increased by $2.21 to stand at $81.03.

The prospects of a sharp drop in Iranian oil exports in the coming months due to renewed U.S. sanctions following President Donald Trump’s decision to withdraw from an international nuclear deal with Tehran has lifted oil prices in recent weeks.

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