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Global oil prices were climbing slightly on Thursday after the Organization of the Petroleum Exporting Countries (OPEC) and its Russian-led allies agreed in principle to keep 1.8 million b/d off the market possibly through 2018.
OPEC Chairman Khalid al-Falih, who is Saudi Arabia’s oil minister, said he was not concerned that U.S. onshore operators might derail the crude oil reduction by raising more domestic rigs and boosting output.
“Global demand will absorb shale,” he said at the meeting in Vienna.
OPEC and its allies group, aka the non-OPEC operators that are led by Russia, together have reduced world output since January. The reduction has sent crude prices creeping higher, which in turn has led to U.S. producers raising more rigs.
According to the U.S. Energy Information Administration, U.S. oil production may reach a record 10 million b/d this year.
The updated OPEC agreement did not disclose whether a mid-2018 review would be discussed, as Russia has indicated it wanted.
Saudi Energy Minister Khalid al-Falih, who chairs the 14-member cartel, said he would prefer an agreement through 2018. However, he noted that in any case, OPEC formally is scheduled to meet again in June.
“When we get to an exit, we are going to do it very gradually...to make sure we don’t shock the market,” he said. Once production curtailments end, however, “we will not lift our foot from the pedal.”
OPEC recently issued a bullish outlook for oil demand in 2018, forecasting demand should increase by around 400,000 b/d to 33.4 million b/d. However, on the heels of OPEC’s forecast, global energy watchdog, the International Energy Agency (IEA), reduced its 2018 oil demand forecast by 200,000 b/d.
“The reality is that even after some modest reductions to growth, non-OPEC production will follow this year’s 0.7 million b/d growth with 1.4 million b/d of additional production in 2018 and next year’s demand growth will struggle to match this,” IEA said. “This is why, absent any geopolitical premium, we may not have seen a ‘new normal’ for oil prices…”
In early trading Thursday, Brent, the global benchmark for crude oil, was a bit higher at $63.06/bbl, while the U.S. benchmark, West Texas Intermediate (WTI), had risen slightly to around $57.65.
In related news at the OPEC meeting, ministers agreed to cap oil output from Nigeria at around 1.8 million b/d and was considering a cap on Libya; both countries have been exempt from reductions because of political unrest and lower-than-normal production.
Following the OPEC announcement, oil and gas analysts at BMO Capital Markets weighed in.
“While the market expected this outcome, we view it as positive for oil prices as well as oil and gas equities,” said the BMO team. “Oil market fundamentals have been improving thanks to stronger economic growth; however, the market remains well supplied and we expect WTI prices to remain rangebound through 2018.”
BMO is forecasting WTI prices to trade in a range from $50 to $60/bbl and see a reduced risk that they would decline into the $40/bbl range.
“Front-month crude oil prices remain supported by heightened geopolitical risk in Saudi Arabia, Venezuela, Iraq and Iran, while later-month prices are more reflective of the global supply-demand balance, in our view.”