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Saturation on oil market could prompt OPEC to change production policy

The OPEC and its allies raised oil production during the last week, trying to offset the decline of Iranian output before the approaching US sanctions. However, the decline in oil prices can make them change the policy at OPEC+ meeting in December.

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The saturation on oil market could lead to a revision of the OPEC supplies. The biggest risk for oil traders after the introduction of imminent sanctions against Iran lies in the fact that no one knows how much the oil exports from the Arab state will decrease.

The Russian oil production has come close to its highest levels just before the country meets with its partners from the Organization of Petroleum Exporting Countries (OPEC) to discuss future supply. The crude oil and condensate production reached average 11.412 million barrels per day last month, according to data from the Russian Ministry of Energy. This is about 160,000 barrels per day more than the levels two years ago – before Russia agreed to cut supplies due to the OPEC+ deal.

The production boom comes amid mixed signals from world oil producers. Russia signaled last Saturday that it could further increase its oil production, just days after OPEC and its allies said they could restrict deliveries again in 2019.

The crude oil prices have fallen by more than 15% since they reached a 6-year high last month. Among the bearish signals that dominate the market are growing stocks, larger production in Russia, the United States and OPEC countries. However, there is also uncertainty about the impact of US sanctions on Iran’s exports and concerns about global demand.

Russia, which relies on energy for almost half of its budget revenues, has repeatedly stated that its plans for future production will depend on OPEC cooperation. The production of the cartel in October climbed to the highest level since 2016 as the increase from Saudi Arabia and Libya compensates for losses from Iran.

OPEC+ oil output

Ministers of the so-called OPEC+ group, which unites Russia, Saudi Arabia and other oil producers, will meet in Abu Dhabi next week before the key summit scheduled for early December in Vienna.

The 15 countries in OPEC produced an average 33.31 million barrels per day in October, the highest since December 2016. That was also up 390,000 bpd from September. Russia, which is not part of OPEC but part of the OPEC+ coalition, continues to produce at post-Soviet record highs.

Iran lost 100,000 bpd in October, due to buyers cutting back as US sanctions near, but the losses were more modest than many analysts had expected. In fact, despite the hardline rhetoric from Washington, the U.S. is poised to grant waivers to several countries that are unable to cut their imports of Iranian oil to zero. Top importers of Iranian oil, including India, China and Turkey, could not slash their purchases to zero without incurring a significant economic cost. The U.S. pressed these countries, but ultimately had to back down.

“Unfortunately, US destructive actions on the international arena can render null the efforts that the oil-developing countries, signatories of the agreement [OPEC], make in order to prevent a new [oil] prices upsurge and market destabilization”, commented the First Deputy Chief of the Russian Government Staff Sergei Prikhodko.

spare oil capacity

Stock markets and oil prices

The stock market usually precedes and outpaced raw material movements. The energy prices have been under pressure in recent days and most likely it is due to expectations of a drop in oil demand.

Another interesting process leading to future forecasts for the oil market, which is the change in the prices of the shares of the state-owned companies that provide services.

This sector was under severe pressure and is currently at a four-year low, something we should not see at such high oil prices, as we witnessed in October, so the market expects volatility and perhaps lower prices – or this shows the shares of these companies.

oil price vs S&P 500