At this weekend’s OPEC+ meeting in Vienna, the majority of oil producers favor an agreement to increase production by 1m barrel per day (bpd). This would likely translate into an actual increase of 600,000 bpd, given not all producers have the ability to raise output. Iran does not favor the deal, with last minute negotiations continuing in hopes of an agreement at the full summit.
Even if a production agreement of the size under discussion is reached, we expect oil prices to remain well supported:
- Venezuela’s oil production is already in free fall due to underinvestment and mismanagement, and the addition of US financial sanctions will likely keep it on a downtrend, sliding toward 1mpbd by year-end from 1.4mbpd today, in our view.
- Following the US withdrawal from the Iran nuclear deal and the re-imposition of oil sales restrictions, we expect Iranian crude exports to drop by up to 0.5mbpd in 4Q18 from 2.5mbpd currently.
- Bottlenecks in oil infrastructure might also slow US crude production growth in 2H18.
So we expect the global oil market will remain in deficit this year and that Brent crude will trade in a USD 80–85/bbl range in 2H18. However, we expect that the global economy and markets will be able to withstand oil prices at this level. The world economy needs 7% less oil to produce the same amount of GDP as it did in 2007 and OECD countries need 12% less. Rising shale production means the US is now a modest net beneficiary of higher oil prices. Net oil producers now represent 34% of global GDP, versus 16% in 2011. We remain overweight global equities.
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