OPEC’s two-day meeting in Vienna has concluded with OPEC agreeing to gradually increase output by 1 mbpd which would translate into a supply addition of 0.5 - 0.8 mbpd by the end of the summer. While the individual quotas have been removed, the overall group’s combined quota remains in place and countries that are unable to increase output would not be required to increase production to maintain compliance. OPEC said that it would target 100% compliance as a group as agreed in November 2016 instead of the over compliance it has seen in the recent months.
The over compliance was largely due to the fall in Iran and Venezuela’s output and the decision to increase supply and achieve a 100% compliance requires an increase in production from key OPEC members like Saudi and UAE to compensate for the loss of production from Iran and Venezuela which have been reeling under the effects of sanctions by the US. Despite the increase in supply, we believe that OPEC will not go below its original production cuts and the decision compensate for the loss of supply at a gradual pace which is unlikely to have a major impact on prices in the short term.
Crude Oil has reacted positively to the news and could possibly be headed higher in the following week as the primary cuts from OPEC remain in place despite the minor increase in output which again is based on loosely agreed combined quota which is fairly difficult task to achieve as oil producing nations. WTI futures are trading at $67.42/bbl and may trend higher in the coming week but is expected to correct further in the short term.