OPEC set to extend production-cut deal despite disagreement among allies

International crude oil prices have increased recently due to the mounting conflict between the US and Iran. The latest jitter came when Iran shot down a US drone over the Strait of Hormuz.

US president Donald Trump played down the drone incident, nonetheless, the tension prevails. Furthermore, indications of an interest-rate cut by the Federal Reserve has supported crude oil prices.

Now all eyes are on the forthcoming OPEC meeting in Vienna, which was earlier scheduled for 25-26 June. However, conflicts among member nations and the G-20 Summit in late June has postponed the meeting to 1-2 July.

The tariff war initiated by Trump against China, Mexico, the European Union and other countries is the primary reason for the weakness in crude oil prices.

Trump and his Chinese counterpart, Xi Jinping, will meet at the G-20 Summit in Osaka, raising hopes that the trade dispute between the countries will finally be resolved.

However, Trump’s stance, which is quite uncertain and ambiguous, is a matter of concern for the market. The US President has launched a 2020 re-election bid. Hence, he would be more uncertain and vocal about key issues, mainly about trade matters. This would hurt the global economy and weaken demand for crude oil.

OPEC has cut its global crude-oil-demand forecast for 2019 due to the trade disputes. According to OPEC, world oil demand will rise by 1.14 million bpd in 2019, 70,000 bpd lower than previously expected. Also, the IEA has cut its demand-growth forecast for FY2019 by 100,000 barrels, to 1.2 million bpd.

A slowdown in the petrochemicals industry in Europe, warmer-than-average weather in the northern hemisphere and weak US gasoline and diesel demand could lead to lower demand for crude oil, according to the IEA.

US crude oil production continues to increase rapidly. It is expected to hit 12.4 million bpd in 2019 and 13.3 million in 2020. As a result, the EIA has lowered Brent crude oil price projections for 2019 and 2020 to $67 a barrel, from the earlier expectation of $70. Therefore, except for the recent geopolitical conflicts, fundamentals are bearish for crude oil.

At present, OPEC and its allies have a deal to cut crude oil output by 1.2 million bpd from January 1. The current deal expires on June 30. Saudi Arabia has assured markets that it, along with its allies, will continue to work toward oil-market stability. Hence, we believe that OPEC will extend its production-cut deal till end-2019 despite much disagreement among the allies.