Daily Insight: Oil Price Overheating: What next for OPEC?

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The OPEC meeting that held on Friday, 22nd June aroused a significant bout of uncertainties. The impressive conformity with production cut has provided significant support for oil prices but conflicting interests within OPEC itself and cries for fair pricing from consuming economies raised the possibility of a production hike with its potential impact on prices too real to ignore.

Beyond the announcement of a new member, Congo, at the OPEC+’s 174th meeting, the focus was more on the over-conformity level of the resolution reached by the cartel to curb falling prices in 2016. As at May 2018, the conformity level had touched 152%, largely due to involuntary production cuts from Venezuela and Libya, further buoying oil prices higher.

While rising oil prices could be good for OPEC+, consuming economies’ (India, China, and U.S.) complaints of high energy costs pose a threat of price overheating. Hence, the decision to bring the conformity level down to 100% as agreed upon in November 2016 which allows members with spare capacity to make up for the involuntary decline in the cartel’s production. This meeting also brought to light the ‘cordial’ relationship between the cartel, Russia, and other non-OPEC members; and the influence they still wield on oil prices irrespective of shale oil production.

From the foregoing, the production ‘hike’ does not appear to pose a gloomy prospect for OPEC in our view, but it is likely to cap further uptrend in prices.

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