The Potential Risk Of High Oil Prices Cannot Be Ignored.
- May 29, 2018 -

Production cuts have been in place for about 18 months, but concerns about oil shortages have begun to weigh on Opec.OPEC secretary general alfredo barkindo said a tweet by President trump in April criticizing high oil prices sparked discussion of possible changes to the deal.China has also reportedly put some pressure on Saudi Arabia because of high oil prices.

Some within Opec are worried about making prices too high.High oil prices will boost us shale oil production.In addition, oil prices above $80 a barrel and could rise to $100 will start to cut demand growth, which some producers see as self-defeating.

Oil prices slumped on Friday and continued to slide on Monday.It follows news that Opec and its partners, including Russia, are considering allowing higher oil production, which could mark the gradual end of the cartel's production cuts.

Attitude change

Due to a five-year average inventory, Iran has the potential risk of supply disruptions, venezuela's oil production fell rapidly, Opec may be forced to take action, after Opec has repeatedly promised to cut production agreement will continue until the end of this year.

"We will ensure that the market continues to move towards rebalancing, but at the same time we will not overcorrect," said Khalid al-falih, Saudi energy minister, according to bloomberg.The comments were significantly different from those made a few weeks ago, when Mr. Falih dismissed concerns about rising oil prices.

The details remain to be determined, but the contours of the potential changes are visible.

Venezuela's falling output means it is producing more than half a million barrels a day less than its quota, and production is expected to continue to decline at a disastrous rate.Angola's oil production is also about 150,000 barrels a day lower than its quota because of ageing oilfields.That means Opec/non-opec production cuts have been implemented at more than 150 per cent as of last month.

Adding between 800,000 and 1m barrels a day will restore the rate of production cuts to near 100 per cent.

Or production growth may be much smaller.A more modest adjustment would be to urge individual countries to meet current production quotas.Either way, Saudi Arabia and Russia are keen to keep the structure of the deal in place.

But the details still need to be worked out.According to the Wall Street journal and bloomberg, the saudis want a softer option, while Russia wants stronger growth.As for timing, output growth could start as early as the third quarter.

Hard task

Yet reaching a New Deal is easier said than done.Increased supply will mean that venezuela's unused production quotas will need to be redistributed to other member states.However, agreeing on the details is a daunting task.

Some problems may complicate the negotiation process.Many Opec members are already producing as much as they can and have little scope to increase production."Only a few members have the capacity to increase production, so implementation will be complex," an Opec source told Reuters.

In addition, if Russia and Saudi Arabia have more leeway to increase production, then it may be at the expense of the fall in output of countries, including Angola, venezuela, and possibly Iran.Iran's output has not fallen, but U.S. sanctions are widely expected to cut it.That is, Saudi Arabia will take market share from Iran, intensifying the conflict between its two main enemies.

Moreover, some Opec officials fear that any change in the details could destabilise the cohesion so far."There is definitely a concern among gulf states that this situation could get out of control," an Opec official told the Wall Street journal.If needed, we need to think realistically about how to respond to new changes.