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The high-five at G20 summit may cost us a lot [Fuel prices]

3 Dec 2018 14:53|Marcin Lipka

"The situation on the oil market becomes more complicated. There are increasingly more signals suggesting that the strong drops in crude oil prices observed over the last two months are coming to an end. This is bad news for drivers, who practically did not feel the 30% drop in petrol prices on the wholesale market at all," writes Marcin Lipka, Conotoxia Senior Analyst.

There is a growing risk that significant reductions in oil production will be announced at Thursday's OPEC+ meeting in Vienna. This news will probably be reflected in an increase in oil prices, and it is possible that the Brent type will accelerate to around 70-75 USD per barrel.

Demand surplus over supply

Spectacular increases in oil production in the USA in recent months, higher oil production in unstable regions of the world (Venezuela, Libya) and high supply from Saudi Arabia and Russia have resulted in a marked increase in global oil reserves.

On the other hand, the scenario of the collapse in Iran's exports did not happen due to the fact that the USA allowed the partial withdrawal from sanctions of key buyers of the “black gold” offered by Tehran.

Consequently, as estimated by the International Energy Agency (IEA) in November, oil reserves in Q4, 2018, will grow at a pace of around 700,000 barrels per day (b/d). If OPEC (including Iran) maintains unchanged production, the surplus in Q1, 2019, would increase to 2.0 million b/d and remain above 1 million b/d until the end of 2019. OPEC+ producers cannot afford this.

Saudi-Russian explosion of joy

Despite the expected reduction in exports by Iran, allowing Saudi Arabia and Russia to keep extraction levels unchanged would continue to increase stocks and lower prices. Therefore, at the Thursday's OPEC+ summit in Vienna, it is likely that the cartel and Russia will decide to cut production.

This is difficult to estimate the reductions, but considering the incredibly good humour of President Putin and the Saudi successor to the throne Mohammad bin Salman at the G20 summit (the media and video went viral, at which both leaders have-five) it can be expected that the Russians will decide on a relatively far-reaching reduction in extraction. Although Moscow is generally less willing to limit production than other leaders of oil countries, it is possible that they will support the position of Riyadh.

The Economic Commission Board (OPEC) suggested cutting production by up to 1.3 million b/d. This is quite a lot, especially given the mining risks associated with Venezuela, Libya and Iran. Production in the USA may also slow down. It seems that a cut of 1 million b/d may result in an increase in the price of this raw material, especially since smaller production is also expected from Canada.

Less oil from Canada

Canada has been struggling to transport oil from the resource-rich Alberta for months. Full storage facilities, a lack of sufficient pipelines and limited possibilities to use railways to deliver oil to refineries in the US caused the collapse of Western Canadian Select oil prices. It was sometimes quoted at several dollars per barrel, while other types of oil were several times more expensive.

Therefore, Canada decided to reduce oil production by more than 300,000 b/d in order to reduce overcrowded storage facilities and not to sell at a lower price. Although 300,000 b/d is only 0.3% of global demand, in the case of strong cuts OPEC+ may lead to increased market tensions.

Polish drivers suffer again

If OPEC and Russia make oil production cuts of around 1.3 million b/d, Brent oil prices are expected to rise to as much as 70-75 USD/barrel in the coming weeks. This might cause very slow falls in fuel prices in Poland (the slowest in the whole EU) to stop, and drivers will completely miss the 30% drop in petrol prices on the wholesale market observed in the last two months.

3 Dec 2018 14:53|Marcin Lipka

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