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Important days ahead for drivers. Three scenarios for the oil market

18 Jun 2018 14:46|Marcin Lipka

“Hot week for the oil market. Investors will speculate how OPEC countries and Russia will react to falling stocks of this raw material. The cost of filling up diesel and petrol during trips in the summer will depend on whether oil production will be increased and by how much,” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

The price of oil, and thus of fuel at petrol stations, is primarily a result of global demand for energy resources and the political and economic interests of OPEC countries, as well as Russia. What are the possible outcomes of the top oil producers meeting in Vienna and how can this affect the prices at the pumps?

Russian scenario is the most positive for the short term

Of the 24 countries that signed an agreement to limit oil production in November 2016, Russia is one of the most important. Interestingly, the representatives of the Russian administration (Aleksander Nowak, the Minister of Energy, among others) are those who want production to significantly increase - even up to 1.5 million barrels per day (bpd).

If this were to happen, we could expect a significant drop in prices (even by a further ten percent or so). The market would be flooded with oil even if such a rapid increase in production would only last for the third quarter. Why do the Russians want to do this? Probably because of concerns that further price increases would prolong the explosion of US production and accelerate the shift from oil importers to alternative energy, which would ultimately affect Moscow's long-term interests.

The 1.5 million bpd increase in oil production would also result in significant price decreases for drivers. In the wholesale market, fuel prices could fall by PLN 0.2-0.3 (20/100-30/100) per litre, resulting in even sharper decreases at stations (PLN 0.25-0.35; 25/100-35/100).

Less rapid changes from OPEC side

On Monday, the Bloomberg agency reported that OPEC was rather closer to the production increase of 300,000-600,000 bpd. This is not enough if we take into account the fact that demand currently exceeds supply and in the following quarters the losses related to the loss of production by Venezuela (economic crisis) and Iran (sanctions from the USA) may exceed 1 million bpd.

A production growth scenario of around 0.5 million is likely to be insufficient to maintain the declining trend in the oil market. This could even lead to an increase in the price of black gold and a return to around USD 80 per barrel if, for example, US production growth started to slow down and demand continued to grow, thus returning to an unbalanced market.

Venezuela, Iran and Iraq do not want to increase production at all

The global interests of Russia and Saudi Arabia still need to be reconciled with the economic situation of other members. Venezuela does not want an increase in oil production because it fears that prices will fall. For technical reasons (lack of investment, lack of capital and lack of people), Caracas is not able to increase the supply of black gold.

The fall in the price of oil is also uncomfortable for Iran. In the next few months, it will have to face American sanctions, which will almost automatically reduce Tehran's production. The Iranian people will therefore lose twice - both from sanctions and from a hypothetical price cut. Iraq, too, is not satisfied with the anticipated amount of production.

There is therefore a risk that Tehran, Baghdad and Caracas (all members of OPEC) will destroy the initiative of any increase in supply. This would be disastrous news for drivers, as in such a scenario a strong increase in oil prices and the recent peaks (USD 80 per barrel) cannot be ruled out. Taking into account the recently expensive dollar, prices at Polish stations could even reach the level of 5.5 PLN/litre.

Neutral compromise. Risk of disagreement

At the moment, the neutral scenario, i.e. the one that would not cause any significant movements on petroleum is an increase in production in the range of 0.6-1 million bpd. Additionally, if it was confirmed by all members on the possibility of further production increase, it could be expected to have a few percent drop in prices and a reduction in the cost of fueling at domestic fuel stations slightly below PLN 5 per litre.

However, the multiplicity of countries involved in the negotiations (24 in total), the tense geopolitical situation and the significant differences in the interests of oil producers will increase the risk that the agreement will include a marginal increase in production (to 500 000 bpd) or no increase in supply at all. In such a scenario, serious risk of a further increase in fuel prices at domestic stations should be expected.

18 Jun 2018 14:46|Marcin Lipka

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