OPEC and Russia have just condemned the world to expensive fuel

22.06.2018 14:51|Marcin Lipka

“Increasing production by about 0.6% is unlikely to solve the problems of insufficient oil supply in relation to demand and falling stocks. This means that drivers should accept the rising prices at service stations. Petrol and diesel can reach record prices,” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

At the meeting in Vienna the OPEC and Russia representatives decided to increase oil production by 600,000 barrels per day (bpd). Unfortunately, this is not enough to stabilise the market in the coming quarters, taking into account the threats of maintaining the current supply from sanctioned Iran and a country in economic decline, Venezuela.

Many disputes, but one common interest

Every major meeting of oil producers is preceded by a number of scenarios. By Friday, the Russians suggested that they wanted to increase production by as much as 1.5 million bpd. On the other hand, Iran did not want to increase production at all because of the sanctions imposed and the lack of technical capacity.

In fact, despite geopolitical differences within OPEC and between OPEC and Russia, the cartel countries have a common interest. It is about achieving the highest possible price while maintaining demand, not stimulating the development of alternative energy sources or extraction from the USA. This interest of the producers has been met and an agreement has been reached. This, however, is bad news for importers and consumers. Fuel prices will remain high and may continue to rise as the fragile balance on the oil market may quickly give its place to declining stocks and insufficient supply.

A return to the top is very likely

According to the estimates from June made by the International Energy Agency (IEA), oil reserves can shrink by around 1.3 million bpd in the fourth quarter, if Iran and Venezuela reduce production. In the second half of 2019, it may even be 1.5 million bpd.

Thus, 600,000 bpd is a drop in the ocean of needs, whose positive effect will disappear just as quickly as it appeared. The decisions made by oil producers mean that there is a high risk that fuel prices will remain at the current price per litre in the coming weeks. Unfortunately, it is also more likely that both unleaded petrol and diesel will become more expensive again in the second half of the year, exceeding the previous records achieved at the beginning of June.

 


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