Opec discusses modest production hike, rallies before Vienna meet

Opec is discussing a relatively modest production increase before its meeting in Vienna this week, an attempt to bridge the gap between Russia’s push for a big rise and Iran’s insistence that no change is needed.

While a compromise may be necessary to overcome vocal opposition from Tehran, Baghdad and Caracas, it could mean the resulting supply boost is smaller than oil traders — or indeed the US President Donald Trump — had been anticipating. Crude prices rallied in London on Monday after two weeks of losses, trading over $74 a barrel.

Members of the Organization of Petroleum Exporting Countries (Opec) are discussing an agreement that delivers 300,000 to 600,000 barrels a day of additional oil supply to global markets over the next few months, according to people briefed on the talks. If agreed, that would be smaller than the 1.5 million-barrel-a-day quota increase that Russia has proposed. “People probably feared 1.5 million barrels a day,” but the current talk indicates a smaller increase, said Torbjorn Kjus, chief oil analyst at DNB ASA. “It’s going to be the most interesting meeting for a while.”

The push by some OPEC members to boost production reflects both internal and external pressures. Within the group, Venezuela’s oil output has collapsed to the lowest since the 1950s due to industry mismanagement, and Iran’s petroleum exports are subject to renewed US sanctions. These twin crises could remove 1.5 million barrels a day from the market by next year, while giving those two nations an incentive to block any efforts to fill the gap.

From outside, Trump is attacking the cartel on Twitter for artificially inflating prices and lobbying hard behind the scenes for a significant production increase. Russia, by far the largest non-member to join the OPEC’s cuts agreement, has said it would be happy with lower crude prices and appears keen to start up new fields. 

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Commerzbank commodities analyst Carsten Fritsch said: “That production will be increased in the second half of the year is considered certain — the only question is by how much.” Despite this, Goldman Sachs said “the oil market remains in deficit ... requiring higher core OPEC and Russia production to avoid a stock-out by year-end”.

The bank said it expected OPEC and Russian output to rise by 1 million bpd by year-end and by another 0.5 million bpd in the first half of 2019.

Adding extra pressure is a trade dispute between the United States and other major powers. Trump last week pushed ahead with tariffs on $50 billion of Chinese imports, starting on July 6. 

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China retaliated by imposing import duties on US products, including crude oil.

Benjamin Lu of brokerage Phillip Futures said Beijing's retaliation had spooked oil investors: “These punitive measures on bilateral trade have unnerved investors as it hurts global economic growth.”

US bank Morgan Stanley said in a note to clients that the trade spat meant that economic “downside risks have risen”.

US oil exports have boomed in the last two years as shale oil production has surged, with China becoming one of the biggest buyers.

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