On Saturday OPEC and non-OPEC producers agreed to raise production by 1 million barrels per day (bpd). Perhaps more important than that, they agreed to return to 100% compliance of the previously agreed upon production cuts of 1.8 million bpd. Production was lagging from struggling countries, i.e., Venezuela, Angola and Libya which effectively equated to a production cut of 2.8 million bpd. Most notably, Reuters reports that Venezuela has been pumping more than 500,000 bpd less than its target. So, let’s clear up the math. OPEC and its non-OPEC partners are effectively saying they are going to be ramping up production by 2 million bpd, 1 million to make up for lost compliance and 1 million in additional capacity. How are the markets reacting? The Brent-WTI spread is getting slammed.
Above is a chart of the August Brent vs August WTI price dating back 12 months. You can see it recently experienced an extremely volatile change. Just two weeks ago, Brent was trading more than $11/barrel higher than WTI. Today, it traded only $4.93/barrel higher than WTI. That is an incredibly swift and sharp move which greatly affects global oil trade. Now U.S. crude exporters’ profits are reduced by that difference, $6.07/barrel, if they are unhedged. If this spread continues to weaken, it could mean that more U.S. crude is used domestically and our stockpiles will begin building again. As far as how this move impacts directional price forecast, analysts are looking for prices to be a bit softer as we close out 2018. Edward Bell, an analyst at Dubai’s Emirates NBD bank, expects prices “in a range between $65-$70 per barrel for Brent for the remainder of the year.”
August Brent last trades down $1.32 to $74.23/barrel, August WTI is lower by $0.23 to $68.35/barrel, August ULSD is off by $0.0265 to $2.1028/gallon, and August RBOB is down $0.0215 to $2.0324/gallon.