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Why OPEC reluctant to push oil prices too high?

11 June 2018 [11:28] - TODAY.AZ

By  Trend

OPEC doesn’t want oil prices to increase too high, as it can encourage non-OPEC countries to boost crude output, Tom Pugh, the economist at British economic research and consulting company Capital Economics, told Trend.

"OPEC doesn’t want to push the price too high as this will encourage non-OPEC production, especially from the US and destroy demand, leading to a repeat of the 2014 price crash. Then OPEC will be forced to continue cutting," he said.

As for the possibility of changing the format of the OPEC/non-OPEC oil output cut agreement, the expert pointed out that the deal will need different quotas but not necessarily a new format.

"It can stick with individual quotas for all the members and the agreement with non-OPEC countries but just change the numbers a bit," he noted.

Regarding the decreasing oil output in Venezuela and Angola and its impact on OPEC deal, Pugh said that he expects the group to distribute Venezuela and Angola’s quota between the other members of the group. "This would result in an increase in output of about 1 million barrels per day."

In April, the biggest decrease in supply came from Venezuela, where the oil industry is starved of funds because of economic crisis. Output dropped to 1.50 million bpd in April, the survey found, a new long-term low.

Production in Angola, where natural declines at some fields are weighing on output, slipped and the country is pumping over 260,000 bpd less than its OPEC target.

As for expectations regarding oil prices, Pugh noted that it would take another severe geopolitical shock to get the market to $100 per barrel, war in the Middle East, a complete collapse of Venezuela etc, something like that. "I don’t think that we are likely to get there based on fundamentals."

In December 2016, at a meeting of oil producers in Vienna, 11 non-OPEC member countries agreed to cut oil production by a total of 558,000 barrels a day. The agreement was concluded for the first half of 2017 and was extended until the end of the first quarter of 2018 at a meeting on May 25, 2017.

At the last OPEC meeting in Vienna, the agreement was again extended until the end of 2018. Azerbaijan supported the decision.


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