Oil prices drop on OPEC's output deal, but markets to stay tight

SINGAPORE - 25 June 2018: Oil prices fell on Monday as traders factored in an expected 1 million barrels per day (bpd) output increase in the wake of an Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna last week.

Despite this, analysts said global oil markets would likely remain relatively tight this year.

Brent crude futures LCOc1 were at $74.25 per barrel at 0636 GMT, down 1.7 percent from their last close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $68.42 a barrel, down 0.2 percent, supported more than Brent by a slight drop in U.S. drilling activity and a Canadian supply outage.

Prices initially jumped after an OPEC deal to increase output was announced late last week as it was not seen boosting supply by as much as some had expected.

OPEC and non-OPEC partners including Russia have since 2017 cut output by 1.8 million bpd to tighten the market and prop up prices.

Largely because of unplanned disruptions in places like Venezuela and Angola, the group’s output has been below the targeted cuts, which it now says will be reversed by supply increases, especially from OPEC leader Saudi Arabia. Although analysts warn there is little space capacity for large-scale output increases.

After officially meeting on Friday, OPEC gave a press conference on Saturday that implied a bigger increase in supply.

“Saturday’s OPEC+ press conference provided more clarity on the decision to increase production, with guidance for a full 1 million bpd ramp-up in 2H18,” Goldman Sachs said in a note on Sunday.

“This is a larger increase than presented Friday although the goal remains to stabilize inventories, not generate a surplus,” the U.S. bank added.

Dutch bank ING said “the 1 million bpd increase announced gives us confidence in our view for lower prices.”

Edward Bell, commodity analyst at Dubai’s Emirates NBD bank said, when the Vienna agreement was priced into the market, he expected prices “in a range between $65-$70 per barrel for Brent for the remainder of the year”.

In the United States, U.S. energy companies last week cut one oil rig, the first reduction in 12 weeks, lowering the total rig count to 862, Baker Hughes (GE.N) said on Friday.

That put the rig count on track for its smallest monthly gain since declining by two rigs in March, with just three rigs added so far in June. However, the overall level remains just one rig short of the March 2015 high from the previous week.

Goldman Sachs also warned that an “outage at Syncrude Canada’s oil sands facility could leave North America short of 360,000 bpd of supply for all of July”.

It added that this “will exacerbate the current global deficit, making the increase in OPEC production all the more required”.