OPEC Eases (Or So It Claims)
Monday, June 25, 2018
Saudi can’t back up promises for 1 million new barrels/day. Crude markets will tighten.
OPEC has officially announced what amounts to a tapering of its production quotas into year-end, to be achieved at first by the end of over-compliance with the quotas. Combined with non-OPEC partners, that means production should increase by 474,000 barrels/day – but dovish Saudi has said unofficially to expect 1 million, and even hawkish Iran has said 700,000. But more than all the over-compliance has come from the collapse of Venezuelan production, and no official announcement can bring that back. Saudi and Russia could probably quickly increase production by at least 500,000 barrels/day, but with the threat of US sanctions, Iranian production has nowhere to go but down. Production growth in the Permian will slow because of takeaway capacity constraints, which won’t lift meaningfully until mid-2019. We reiterate our trading range for crude of $65 to $75, and expect upside overshoots.