Thursday 28 Mar 2024
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KUALA LUMPUR (July 5): OCBC Treasury Research sees Brent crude oil reaching US$80 per barrel, possibly before the end of July, if the planned output in August remains the same as July.

"If the output increases as planned, we expect the target of US$80 per barrel to be met possibly only towards the end of 2021," its economist Howie Lee said in a report today.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, ended Friday’s meeting without a deal, as OPEC+ had wanted to add an additional 400 thousand barrels per day (kbpd) of supply to its existing output beginning August to December, but the United Arab Emirates (UAE) has vetoed the decision.

This was because OPEC+ has determined the UAE’s production baseline at 3.2 million barrel per day (mbpd) in October 2018, but the UAE wants a review and upgrade of its baseline from 3.2 mbpd to possibly as high as 3.8 mbpd, which meant any increase in OPEC+’s output would result in the UAE having a larger share.

According to Lee, the proposed OPEC+ increase meant either other OPEC+ members have to allocate their quota to UAE if the bloc keeps to their supply increase of 400 kbpd, or the bloc will have to increase the overall supply increase to accommodate the UAE’s demands.

“Failing which and assuming the UAE does not back down, the proposal to further increase output beginning August will unlikely materialise and August’s output will remain the same as July,” he said.

He also said the worst-case scenario for the OPEC+ meeting is the faint possibility of the UAE fully dissenting, choosing to produce the amount it deems fair to them.

“This prompts other members to follow suit, scuppering the entire supply curbs at present."

However, he noted that oil demand is much stronger than a year ago, which means a collapse to last year’s March/April levels is a very low possibility.

“But we won’t rule out Brent falling back to US$50 in this scenario, which is a 35% decline from current levels,” he said.

On whether the deadlock will lead to an oil crash, Lee said chances are slim, but it is higher than what it looks on the surface.

“On surface, the risk to prices this time is tilted to the upside, since the UAE opposes an increase in output.

“But we won’t draw the line there just yet. There is a decent possibility if the UAE’s request to upgrade its base production is approved, other OPEC+ members will submit similar requests. Pressure to then revise output across the bloc may grow in subsequent meetings,” he said.

In a separate report, Swissquote Bank senior analyst Ipek Ozkardeskaya said if OPEC+ fails to find an agreement and the crisis deepens at the heart of the cartel, then oil prices will fall free.

"We could see a serious dive which could throw the price of a barrel to US$50/55 region, as there would be a dramatic, structural change in the supply side of the game.

"Also, the Saudi-UAE conflict is more serious than the OPEC/Russia disagreement, given that we are now talking about a friction within the cartel itself. The fall of OPEC is of course not the base case scenario as everyone has a lot to lose in a situation like this — the lone sheep is always in danger of the wolf."

He expects to see a rally to the US$80 mark if Saudi convinces the UAE to follow the extension of a lower-supply regime until the end of next year.  

Could we see an advance to US$100 per barrel in case of agreement? Ozkardeskaya said: "Hardly, or hardly sustainable, as higher oil prices are not good for the economic recovery, as a too rapid rise in energy costs would curb the global demand. Also, if oil prices continue rising at the current speed, inflation which already hit 5% in the US in May, will further threaten the US Federal Reserve’s ultra-supportive monetary policy and would be a second hit on companies.

"Therefore, the upside potential in oil remains limited in both cases, yet the latest frictions between Saudi and the UAE increased the risk of seeing a sizable downside correction in global oil prices," he added.

Crude oil traded in the US$75.45 range for West Texas Intermediate on the New York Mercantile Exchange at the time of writing.

Edited ByKang Siew Li
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