Oil drops after OPEC+ output deal, but markets to stay tight

Brent crude oil fell 1 percent on Monday as investors prepared for an extra 1 million barrels per day (bpd) in output to hit the markets after OPEC and its partners agreed to raise production. Despite the increase, which is intended to stop the gap between global supply and demand from becoming too wide, analysts said global oil markets would likely remain relatively tight this year.

Brent crude futures were down 78 cents at $74.78 a barrel at 0917 GMT, while U.S. light crude was up 25 cents at $68.83 a barrel, supported in part by a Canadian supply outage.

Prices initially jumped after an OPEC deal to increase output was announced late last week, as it was not seen boosting supply by as much as some had expected.

OPEC and non-OPEC partners including Russia have since 2017 cut output by 1.8 million bpd to tighten the market and prop up prices. 

"As yet there is no plan as to how the limits will be reallocated. One simple approach would be to reduce the limits of those not producing enough by 600,000 bpd and increase the limits of members with spare capacity by 600,000 bpd – this would enable 100 percent compliance," said Callum MacPherson, Investec head of commodities.

"However, it seems unlikely members like Venezuela would give up unused limits in this way. Instead those unused limits might be left in place, so 100 percent compliance would in theory mean an additional 1.2 million bpd hitting the market, even though this would not be achievable in practice."

Largely because of unplanned disruptions in places like Venezuela and Angola, the group`s output has been below the targeted cuts, which it now says will be reversed by supply increases, especially from OPEC leader Saudi Arabia. Analysts warn however there is little spare capacity for large-scale output increases.

After officially meeting on Friday, OPEC gave a press conference on Saturday that implied a bigger increase in supply.

"Saturday`s OPEC+ press conference provided more clarity on the decision to increase production, with guidance for a full 1 million bpd ramp-up in 2H18," Goldman Sachs said in a note on Sunday.

"This is a larger increase than presented Friday although the goal remains to stabilize inventories, not generate a surplus," the U.S. bank added.

Edward Bell, commodity analyst at Dubai`s Emirates NBD bank, said when the Vienna agreement was priced into the market, he expected prices "in a range between $65-$70 per barrel for Brent for the remainder of the year".

Goldman Sachs also warned that an "outage at Syncrude Canada`s oil sands facility could leave North America short of 360,000 bpd of supply for all of July".

It added that this "will exacerbate the current global deficit, making the increase in OPEC production all the more required".