World oil market waiting for OPEC meeting on Friday - FORECAST

Baku. 3 June. REPORT.AZ/ OPEC will meet in Vienna on Friday for the first time since last November when a decision to keep the production target unchanged sent the price down by 10% in just one day. The move took the market by surprise as OPEC stepped away from trying to stabilize oil prices and instead opted to defend market share via a "supply and rule" strategy. In response to this decision, the price of Brent crude fell from 77.75 USD a barrel at the day of the meeting and kept falling until it reached 45.20 USD a barrel on January 13. Since then, an improved outlook for global demand, strong seasonal refinery demand in the US and a continued build of strategic reserves in China has helped support a recovery back to the current level of 65 USD a barrel for Brent crude and 60 USD a barrel for WTI crude.

It was clarified by the Head of Commodity Strategy of Saxo Bank Ole Hansen. According to him the market share has been more than defended with both Saudi Arabia and Iraq increasing their combined production by 1.1 million barrels since last November. In the US, the number of oil rigs has been cut by almost 60% since the last OPEC meeting and as a result production has begun to slow (especially during the past few weeks) and this trend is expected to continue over the coming months.

This is not the time, however, for OPEC to declare "victory" as the slowdown in US production is very price-dependent. Increased hedge activity from producers has been seen in the futures market at current prices and this could be the prelude for a pick-up over the coming months. At the same time, some of the major producers have stated that a return to 65 USD a barrel crude on WTI would trigger a pickup in production.

The recent pick-up in production from Saudi Arabia and Iraq has left current production levels above 31 million USD a barrel. Given OPEC 's current emphasis on market share instead of price, it would make sense to bring the target closer into line with current production.

Saudi Arabia and Iraq would most likely be in favor of such a decision as it would help legitimize the dramatic rise in production these two countries have achieved in recent months. The market's reaction to such a decision would probably be muted as long as expectations of continued demand growth can be achieved. If not - and if we should see another build in US inventories following the peak summer months of demand – the cartel may be left high, dry and struggling to decide who should cut back in light of renewed weakness.