The Organization of Petroleum Exporting Countries (OPEC) held their bi-annual meeting in Vienna on Friday, June 22. The cartel left the meeting with a plan to raise oil production in the second half of 2018 by an estimated one million barrels per day (mmbd). Despite the news of increased production, oil and refined product commodity markets rose. The result could be seen in the US diesel market, as the national wholesale average diesel price increased 4.70¢ per gallon on Monday, June 25.
OPEC and supporting countries (led by Russia) have been under a production quota to remove 1.2 and 0.6 mmbd, respectively, since January 2017. This quota was announced in late 2016 with an aim to lower global crude oil inventories and bolster oil prices. The strategy has proven successful, as witnessed by the price of Brent Crude oil – an international benchmark – which has increased by roughly 60 percent to over $70 per barrel since late 2016. The new high price environment is what led OPEC to contemplate oil production increases.
A closer look at OPEC production reveals that cuts have far exceeded 1.2 mmbd in recent months, as shown in the chart below. Reinstituted sanctions on Iran, economic turmoil in Venezuela, and civil unrest in Libya have all negatively impacted overall OPEC production levels. According to April’s data, OPEC output was roughly one million barrels lower than the quota at 2.2 mmbd below the baseline. Therefore, the recent OPEC announcement is more of return to the original quota levels than a boost to oil production. More importantly, the issues facing these struggling OPEC nations is leading many to question just how the cartel will prescribe their production increases in the coming months.
Oil and diesel prices decreased in anticipation that the cartel would increase production by an extra 1.5 to 1.8 mmbd, as witnessed by the decrease of over 10¢ per gallon to the national diesel wholesale average in the two weeks leading up to the meeting. OPEC’s inability to meet these expectations is what caused diesel prices to rise by nearly 5¢ per gallon. Monday’s upstream oil commodity trading showed slight price declines, which could indicate that the OPEC’s short-term impact on prices is over.
If you have any questions on the recent OPEC announcement or its impact to diesel prices, please contact the Applied Knowledge Team at AppliedKnowledge@breakthroughfuel.com.