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Abu Dhabi, UAEMonday 23 July 2018

An Opec+ output increase could drag down oil prices by $3 to $5 per barrel, says MUFG

The Japanese bank says the probabilty of a production hike is nearly 55 per cent

Analysts have noted that Opec's meeting on Friday could be its most politically fraught-ever. Stefan Wermuth/Bloomberg
Analysts have noted that Opec's meeting on Friday could be its most politically fraught-ever. Stefan Wermuth/Bloomberg

Opec could look at increasing production in similar weighted proportions to the ongoing curbs at the grouping’s meeting in Vienna on Friday, prompting a decline in oil prices by $3 to $5 per barrel, in the third quarter of 2018, according to the Bank of Tokyo-Mitsubishi (MUFG).

“Saudi Arabia had taken 486,000 barrels off the market. If you divide that by the overall production cut, that’s a 20, 25 per cent weighting on the increase,” said Ehsan Khoman, research head and Mena strategist at MUFG in a media briefing.

“Our expectation is that the same weighting for the production cuts will be used for the production increases,” he added.

Opec+, as the grouping compliant with production cuts to bolster prices of oil are known, are meeting in Vienna to revise the agreement to slash 1.8 million barrels per day. A higher oil price environment, which saw Brent at $80 per barrel and oil inventories at a five-year low, as well as behind-the-scenes pressure by the US Trump administration is likely to sway the group to increase production to steady prices. MUFG has cited the possibility of a gradual increase of 350,000 to 750,000 barrels per day (bpd) at 55 per cent, which it anticipates will lead to a bearish impact on prices, which could decline by $3 to $5 per barrel in the third quarter of this year.

Opec+ anticipates a tense meeting, with members Iran and Iraq openly voicing concerns about production increases, which could hurt the price at which they sell oil in global markets, at a time of deep necessity for both economies. Iraq, which looks at a capacity of 6.5 million barrels per day by 2021 needs healthy oil revenues to rebuild the country post-Isis, while Iran needs steadier prices to sell more barrels before US sanctions kick in later this year.

MUFG, however, anticipates a scenario of “calmer heads” prevailing in a politically fraught meeting, ahead of which rumours circulated that Saudi Arabia may have relented to US pressures to lower prices to appease an electorate preparing for mid-terms as well as peak driving season demand.

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“Our view is that calmer heads will prevail from Iraq and Iran as well as from Venezuela, Libya and Nigeria. They would want to show and demonstrate the capacity and capability of Opec as an organisation and to have two different communiqués come out of this meet will show weakness and that could potentially lead to significant downsizes in oil prices,” said Mr Khoman.

The meeting will be far from the smoother consensus Opec+ had arrived at in recent months, with some members such as Iranian oil minister Bijan Zanganeh saying outright that he doesn’t “believe in this meeting we can reach an agreement”, ahead of the summit.

Opec, which counts for one-third of the world's oil production with a mandate to efficiently manage demand and supply of the resource would likely distance itself from being seen as an organisation coming under the influence of any political entity, noted Mr Khoman.

“Two-thirds [of global production] is out of Opec’s hands and for the members to adhere to what any politician around the world is saying goes against the mandate of its own statutes,” he said.

Should Opec fail to reach consensus, which MUFG has pegged a probability of 5 per cent, oil prices could prove bullish and rise by $5 to $10 in the third quarter of this year.