Oil-producing Gulf countries will be the main beneficiaries of a recent decision by OPEC members to hike crude production by one million barrels per day, analysts said.
According to Monica Malik, chief economist at Abu Dhabi Commercial Bank, OPEC members' statements indicated a move to a group-wide ceiling, rather than the individual country allocation, hence allowing members with spare capacities to increase production to compensate for lower or falling output from other countries.
In this scenario, Saudi Arabia, the UAE, Kuwait and Iraq are the main countries that have the capacity to increase production, she said.
"We expect a rise in production from Russia. Output by OPEC countries will have to rise by 700,000 bpd to reach 100 per cent compliance based on May data, and by 150,000 bpd by non-OPEC members. Ahead of the decision, GCC members of the OPEC only had limited capacity to increase oil output under the individual target levels. We now see these GCC countries increasing their output above their OPEC quota levels in the second half of 2018, supporting real GDP growth in their oil sectors," Malik said.
Meanwhile, Iranian oil production is expected to fall from the fourth quarter of 2018 as US sanctions take effect. And Venezuela's oil output was around 540,000 bpd below its target level in May.
Khalid Al Falih, Saudi Arabia's energy minister, stated that the new agreement implies an output increase of one million barrels per day, while other OPEC members indicated an increase of 500,000 to 800,000 bpd.
Garbis Iradian, head of research for the Mena region at the Institute of International Finance, said near-term oil production growth from the US and Canada may not be enough to offset supply shortfalls in Venezuela, likely losses from Iran, and the 1.4 million bpd growth in global demand for oil. Hence, OPEC and other non-OPEC countries could potentially plug any gap.
"However, there are only a few oil exporters who agreed on production cuts in early 2017 with significant spare capacity to increase output. These mainly include Saudi Arabia, Russia, the UAE, Kuwait, Iraq and Kazakhstan. If we assume a modest further decline in Venezuela's production and add Iran's likely loss of oil exports, then about one million bpd of additional oil would be needed to fill the gap.
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"In this case, Saudi Arabia's output [with two million bpd spare capacity] needs to increase by at least 400,000 bpd in the second half of 2018 to offset the supply shortfall and lead to a marginal increase in global inventory levels. Russia could increase its output by 300,000 bpd, while others [Kuwait, the UAE and Iraq] increase by 300,000 bpd," Iradian said.
Edward Bell, commodities analyst at Emirates NBD Research, said the OPEC has space to raise output by around 700,000 bpd from its production levels in May.
Though the OPEC didn't disclose country quotas in the recent announcement of 1bpd output hike, Bell sees there are a few countries with available capacity to raise production and any increase in production would be borne most significantly by Saudi Arabia, the UAE and Kuwait.
These three countries have around 2.75 million bpd of spare capacity, accounting for around 85 per cent of the OPEC's total, according to International Energy Agency estimates.
Brent price on Friday rose $1.54 a barrel to $79.39 on concerns that US sanctions against Iran would remove a substantial volume of crude from world markets at a time of rising global demand.
Oil price forecast
Malik expects some moderation in the oil price in the coming months as GCC countries raise their production levels to bring group compliance levels to 100 per cent.
"We believe that Saudi Arabia will particularly increase output over the summer to meet its seasonally higher demand and bring OPEC production to the target level. Moreover, increased production by GCC countries will also reduce any market fears of further supply shortages especially as Iranian sanctions take hold in November. We maintain our Brent crude forecast of $70.80 per barrel for 2018 and $66 for 2019, following the OPEC meeting, though highlight some moderate upside risks for 2018," she said.
Iradian sees the recent oil deal would leader to slightly lower oil prices towards the end of 2018 and in 2019.
"We expect Brent oil prices to average $73 per barrel in the second half of this year and $65 a barrel in 2019. The re-imposition of sanctions on Iran may have been factored into the rapid increase in oil prices in recent months," Iradian added.
Bell sees Brent ranging between $65-70 a barrel for the remainder of the year.
By Waheed Abbas