By Mike Eggleton, Senior Manager
In June 2018, OPEC (Organization of the Petroleum Exporting Countries) members announced their first increase in supply since implementing production cuts in December 2016. Over this 18-month period, the spot price of Brent crude oil increased by almost 40%, averaging US$74.41 per barrel (pb) in June 2018.
With this latest announcement, OPEC has reacted to calls from major consumers – most notably the U.S., China and India – to curb rising fuel costs, which they fear might undermine global economic growth.
However, the decision does not mark a complete reversal of OPEC’s position. Any increase in supply will merely bring production levels back up to those previously agreed in December 2016. Some members – most notably Venezuela, Libya and Angola – have been unable to meet their official quota; so Saudi Arabia will simply increase its own production to make up the shortfall.
The supply situation improved further in July with the unexpected resumption of Libyan production, potentially returning 700,000 barrels per day (bpd) to the global market. A possible softening in the U.S. position towards countries wanting to buy Iranian oil has also taken some of the heat out of oil prices. Between July 2nd and 17th, Brent crude spot prices fell by more than 5%.
The boost to supply may prove to be short-lived however, with exports from Iran and Venezuela expected to decline from the fourth quarter of 2018.
Outlook for 2019
As the world economy loses some of its momentum in 2019, growth in global oil demand will slow from 1.7% to 1.5%. Emerging markets will account for more than 80% of incremental daily demand, with China and India responsible for most of this increase.
With growth of 3.5% expected for 2018, OPEC forecasts non-OPEC oil supply to rise by a further 3.5% in 2019. Whilst growth in U.S. shale output will slow next year, production will ramp up in Brazil, and Canada will continue to expand output from its oil sands deposits.
As OPEC expects demand for oil produced by its members to fall by more than 2% in 2019, it should have sufficient spare production capacity to ensure oil market stability, should global demand prove to be stronger than expected.
The latest forecasts from three organizations suggest oil prices will increase by more than one-third during 2018 to around US$73 pb.
OPEC’s commitment to a stabilized global market provides some reassurance that prices should be reasonably steady in 2019. Price predictions currently range from US$69 to US$77 pb (Figure 2). These figures point to oil price movements of between -4% and +2% year-over-year.
Given the continued uncertainty about supply, particularly among key producers like Iran, Libya and Venezuela, it seems reasonable to predict at least a small rise in oil prices. When the balance between supply and demand looks under threat, markets can be quick to react with price hikes. And if often takes time for producers to restore stability. To accommodate these risks, we have therefore adopted US$75 pb as our oil price assumption for the 2019 Industry Forecast. Sign up for this upcoming report and see previous Industry Forecast reports and updates here.
 Business Insider, July 17, 2018
 Oxford Economics, EIA, EIU