October 15, 2018
Business

Opec will not increase oil supply, calling price surge short-term spike

The Organisation of the Petroleum Exporting Countries (Opec) has said that that it will not rethink its supply strategy even after oil reached $80 (£59) per barrel, labelling it a short-term spike rather than supply shortage.

Brent crude price reached $80 per barrel today, which is the highest point since November 2014, and is a result of geopolitical tension after President Donald Trump's decision to pull the US out of the Iran nuclear deal.

Opec, which is a consortium of oil exporting nations, has this far not filled the supply hole in the market as it believes that the issue is not a lack of supply, but rather a a short-term spike in the market that will eventually blow over.

Read more: Premier Oil ramps up oil production to pay off £2bn debt

Oil and gas research analyst Jack Allardyce at cantor Fitzgerald Europe said: “There is now a firmer consensus around the potential impact of lost Venezuelan/Iranian exports, and as such, we see little to drive benchmarks much higher in the immediate term.”

“While global inventories are approaching long-run averages, there is a building concern over demand growth, partially on account of higher prices. In short, it feels that fundamentals have found a bit of balance, although firmer indications of the impact of renewed sanctions on Iran may well change the picture.”

Iran's oil production has declined and is expected to continue to do so when US sanctions are reimposed and Venezuela's production has also reduced dramatically as the country has not invested enough in its industry.

There is now a concern that because of the decrease in supply and Opec choosing to cut production by 1.8m barrels per day until the end of 2018, the prices could continue to increase to as much as $100 per barrel within the next few years.

Senior market analyst Fiona Cincotta at City Index said that although the increased US production is putting pressure on the oil prices, they are now overshadowed by the lack in production from both Iran and Venezuela.

She said: “Venezuela's problems are unlikely to be resolved anytime soon and could be exasperated if Trump aims sanctions at the troubled country following rigged and unfair elections. Also if the US can get China to loosen energy ties with Iran, then regardless of increased US shale production, the price could close in on $100.”

According to investment bank Morgan Stanley, new international shipping regulations will cause Brent crude to reach $90 by 2020 as shipping vessels will be forced to use lower sulphur fuels triggering the need for more crude.

Read more: Oil prices surge to new high as 2m Iranian barrels go off the market

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