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We need to be ready for new fuel price highs

2 Jul 2018 11:57|Marcin Lipka

“The United States is putting pressure on Saudi Arabia to increase its oil production and thus reduce fuel prices. However, the treatment of Washington may be ineffective not only because of Riyadh's reluctance to abolish OPEC, but also because of the prospect of dramatic reductions in oil production from Iran and Venezuela,” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

There was quite a lot of confusion on Saturday about President Trump's tweet over Saudi Arabia's ability to increase oil production by up to 2 million barrels a day (bpd).

Even the structure of Donald Trump's message was unclear. It was difficult to say whether he agreed with Saudi Arabia in the context of increasing extraction or with the fact, that we are dealing with high prices. In addition, 2 million bpd is exactly what the country's spare capacity is. Increasing supply by a maximum limit may and would now lower prices, but to be able to react to unpredictable events (sudden production problems in the world) would not be so beneficial for consumers at all. This is because it would generate the threat of a completely uncontrolled price increase (e.g. by a dozen or even several dozen percent in a short period).

After several hours, in an official statement from the White House it turned out that King Salman bin Abdulaziz only confirmed to the U.S. President that the Saudis have a 2 million bpd leeway for increasing production (information commonly known for years). However, ‘it will be used wisely and in consultation with other producers and if necessary provide balance and stability for the market’. This last comment is, of course, a suggestion that Saudi Arabia is keeping its last commitments towards OPEC.

Foundations and geopolitics raise prices

On Monday morning, oil was slightly cheaper, but it can be seen that the weekend sweeping did not change the sentiment of investors in any way. First of all, despite the closer cooperation with Washington, Riyadh is not willing to give up OPEC, of which the Saudis are de facto leaders and are thus not only trying to optimize oil prices (for the producers benefit), but are also developing their influence in the region.

It should also be remembered that the main element of the price increase is the fear of further dramatic reductions in production by Iran and Venezuela and solid demand (absorbing the increasing production from the US). The lower supply from these countries under one of the IEA scenarios is even 1.5mn bpd less oil next year. Anxiety also surrounds, for example, the supply situation in Libya and Canada.

As a result, last weekend's events slightly changed in terms of future prices. There are low chances of resolve OPEC and to have a full competition between manufacturers despite pressures from Washington. In addition, sanctions imposed on Iran and the economic catastrophe combined with Venezuela's isolation continue to increase prices. The fears of a further several hundred thousand bpd from Canada and Libya do not allow for a major price correction.

Records at Polish stations will arrive soon

Crude oil denominated in US dollars is close to its highest level since the end of 2014. In addition, the Polish zloty is weak, which means that fuel prices expressed in the Polish currency return to the peaks reached at the end of May on the European market .

Fast-growing wholesale prices will probably translate into a price increase of approximately PLN 5.10 per litre for diesel and PLN 5.15 per litre for unleaded petrol in the first half of July. Taking into account the oil situation and PLN markets, there is a growing risk that these levels will be exceeded in the second part of the month.

2 Jul 2018 11:57|Marcin Lipka

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