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Abu Dhabi, UAEWednesday 18 July 2018

Brent expected to moderate to $70.8/barrel in 2019, says ADCB

The Abu Dhabi lender has kept its outlook for oil prices unchanged despite moderate downside risks

A trader works on the floor of the New York Stock Exchange (NYSE) in New York. US stocks climbed following gains in Europe as OPEC's plans to boost output less than some investors had anticipated sent oil on a tear. Oil prices are expected to moderate over the coming months on the back of output increases from Saudi Arabia, with GCC countries expected to increase production as well in the second half of the year according to Abu Dhabi Commercial Bank. Photographer: Michael Nagle/Bloomberg
A trader works on the floor of the New York Stock Exchange (NYSE) in New York. US stocks climbed following gains in Europe as OPEC's plans to boost output less than some investors had anticipated sent oil on a tear. Oil prices are expected to moderate over the coming months on the back of output increases from Saudi Arabia, with GCC countries expected to increase production as well in the second half of the year according to Abu Dhabi Commercial Bank. Photographer: Michael Nagle/Bloomberg

Oil prices are expected to moderate over the coming months on the back of output increases from Saudi Arabia, with GCC countries expected to increase production well above their Opec quota levels in the second half of the year, Abu Dhabi Commercial Bank said in a note.

The bank has not changed its forecast for the price of benchmarks Brent and West Texas Intermediate in 2019 at $70.8 per barrel and $66/barrel respectively, while underlining moderate upside risks to prices in the forthcoming months.

The price of Brent, the benchmark for light, sweet crude fell 1.5 per cent on Monday as markets weighed on the reality of output increases from Opec and non-member producers led by Russia. Brent crude futures dropped to $74.22 per barrel while WTI crude futures fell to $68.42 a barrel. The fall comes in contrast to the earlier bullish market reaction to Opec’s announcement of production increases without specifying country-wide quotas.

Opec+ as the grouping undertaking market corrections led by Saudi Arabia and Russia are known, reversed their earlier pact to cut supply to steady prices, to suit consumers and seasonal high demand. The group agreed on a pact to boost production up by 770,000 barrels per day from July, without specifying quotas for countries. It is widely expected that Saudi Arabia and Russia, countries with significant spare capacities will take the lion’s share of output increases.

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“The GCC Opec producers (Saudi Arabia, the UAE and Kuwait) and Iraq are the main countries that have the capacity to increase production meaningfully, in our view,” said ADCB in its note.

"We also expect a rise in production from Russia. Output by Opec countries will have to rise by 700,000 bpd to reach 100 per cent compliance based on May data, and by 150,000 bpd by the non-Opec members,” it added.

Real GDP growth in the oil sectors will remain supported by a “return to growth”, according to the bank, as it expected higher oil revenues with restraints on output expected to be loosened.

Iranian oil production, meanwhile, is expected to fall by 300,000 to 500,000 bpd, when US sanctions take effect, but the bank observed that such a decline would only take effect in the fourth quarter of the year.

ADCB’s view is supported by US investment bank Goldman Sachs, which cautioned that the blow to Iranian oil production may be more than expected. Barclays Bank on the other hand observed in a recent note that the new pact will reverse the expected deficit of 200,000 bpd for the second half of the year to 200,000 bpd in surplus.

Japan's Mitsubishi UFJ Financial Group expects considerable volatility to remain in the oil markets.

"If all members are to participate in the production ramp-up, some countries’ capacity to meet their targets will be questionable," MUFG said in a report on Monday. "Prices will also be susceptible to headline risks throughout the summer, as they are expected to reconvene and assess market conditions on a regular basis."

MUFG said for 2018 as a whole it forecasts Brent and WTI to average $70.6 and $65.1 per barrel, respectively.