Oil price drops after Opec deal, but markets stay tight

Kirill Dmitriev Chief Executive Officer of the Russian Direct Investment Fund speaks during a session of the St. Petersburg International Economic Forum in Russia on Monday

Oil price drops after Opec deal, but markets stay tight

Saudi Aramco did not respond to an email outside business hours. "Indeed, any effort to boost production will be aimed at preventing a price spike as more and more barrels go offline around the world", said Oilprice.com. When prices fall, oil-reliant nations still have incentives to defect because increasing production can alleviate revenue shortfalls.

Trying to make up for disrupted supply, the Organization of the Petroleum Exporting Countries (OPEC) said late last week it would increase output.

Now the strategy has shifted. The cartel functions because member countries can raise prices by cutting output in a coordinated way, but the increased US output reduced OPEC's overall market share, and thus their leverage. "Obviously, we have a market that is stressed from the standpoint of supply".

By around 1400 BST, the price of Brent Crude oil was 0.97% higher at $75.27 per barrel.

The market rallied further in post-settlement trading, after the American Petroleum Institute said USA crude inventories fell a surprising 9.2 million barrels, far exceeding the decline of 2.6 million barrels that had been expected.

It may be that Forbes may have underestimated the supply gaps in the market.

The Financial Times (FT) said that despite the prospect of an extra 1 million bpd of oil, 2.3 million bpd could be lost through disruptions in Venezuela, Iran and Libya by the end of the year.

The BoilerJuice heating oil chart shows the rise and fall in oil prices in the last month, there has been a decrease in the average oil price in the last few days.

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However, while Trump's move attracted the usual share of criticism, Gene McGillian, vice president of market research at Tradition Energy, conceded that while "what the effect is going to be [will] be the hard thing to measure, it could point to more demand for US oil".

"The significant risk to this forecast is that production in Iran or Venezuela collapses, which could offset all of the increase in output from the rest of OPEC and Russian Federation, resulting in a much tighter market", he said.

Paul Horsnell Head of Commodities Research at Standard Chartered said there could be a further 1.5 million to 2.3m b/d drop by the end of this year just from those three countries. However, OPEC reduced more than what was required. Who is OPEC and how are these decisions affecting us?

An oil pump jack is seen at sunset near Midland, Texas, U.S., May 3, 2017.

The US president tweeted within an hour of OPEC announcing its deal: "Hope OPEC will increase output substantially".

Thomas Pugh, a commodities economist at the London-based Capital Economics, wrote in a note that OPEC is now producing nearly 1 million bpd below its collective quota; and Saudi Arabia, Kuwait, the United Arab Emirates and Qatar collectively produced about 900,000 bpd less in May than they did in December 2016.

The future of Iranian crude exports is also unclear.

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