Global outages overshadow underwhelming OPEC output hike

With Iran, Canada and Libya driving down global output, the OPEC production increase may not be enough to stop the incessant rise in oil prices.

Oil pump
Source: Bloomberg

The decision from the Organisation of the Petroleum Exporting Countries (OPEC) to raise production was expected to resolve the exuberance of a market that has been overwhelmingly bullish over the past 12 months. The rise from $42 to $73 over the space of a year highlights the major appreciation in oil prices, despite continuously rising output in middle America.

With OPEC finally agreeing to increase output, markets have clearly been underwhelmed, with one million barrels per day (BPD) likely to be closer to 700,000 BPD, factoring in the inability of some nations to raise output. With US President Donald Trump calling for a two million BPD rise in output from Saudi Arabia this weekend, it is clear that this may not be the last we hear on this issue. However, there are other factors playing into the market perception of where oil prices should be right now.

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The Iranians were perhaps the most vocal of the OPEC members dissenting from the Saudi-Russian plan to raise output, with US sanctions limiting their ability to take advantage of such a plan. Ultimately, the Saudi Arabians won as expected, yet there is reason to believe the Iranians limited what could have otherwise been a more substantial production increase. However, while the Iranians were acting to influence short-term decision making at OPEC, they are likely to continue affecting prices, with the US hoping to radically slash Iranian crude sales. While June saw Iran export over two million BPD, we could see a massive shock to the crude market if the US manages to reduce exports to zero by 4 November. The two main importers of Iranian crude are China and India; both of whom import around 400,000 BPD currently. With India begrudgingly willing to entirely withdraw from Iranian oil, the Chinese are less likely to bow to US pressure. Nevertheless, with a potential production cut of one million to two million BPD coming into play, it is no wonder a sub-one million BPD production rise has failed to dent market optimism.

Libya and Canada

The recent halt in crude production in the Syncrude oil sands region of Canada helped provide a boost to oil prices, particularly WTI. The tightening of the spread between Brent ($78) and WTI ($74) highlights this focus on Canadian output, which is expected to remain in place throughout much of July. Meanwhile, Libya has also seen issues affecting output levels, with exports suspended from the key Zueitina and Hariga ports; disrupting 850,000 worth of supplies. If we do not see Libyan crude exports rise back to normal levels in the near future, this is going to be yet another curveball for OPEC to navigate.

With disruptions to Libyan and Canadian crude production hitting the market at the same time as US sanctions on Iranian crude exports, it is not surprising we are seeing markets largely disregard the somewhat negligible rise in production agreed less than two weeks ago. The daily WTI chart highlights the bullish breakout we have seen since that announcement (vertical dotted line), with the price reaching a three-year high. With the Canadian outage also happening on 22 June, there is reason to believe that this reaction is taking that event into account too. However, unless we see a sharp rise in production, crude prices could be on the rise for some time.

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