Oil: Target raised to $85 as OPEC unity is under threat – ANZ

The failure of OPEC+ members to agree to supply increases in August presents challenges for the oil market. In the absence of a deal, the current production cuts remain in place. This will see the market tighten further as demand surges amid easing travel restrictions over the northern summer holiday period. Economists at ANZ Bank have subsequently raised their short-term (0-3m) target to $85/bbl.

OPEC disunity threatens to disrupt the oil market

“Amid strong demand, no additional supply from OPEC in August would see crude oil markets tighten. However, a lack of unity in the group presents a real risk over the medium-term.”

“It appears the current production cuts will remain. Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, seemed to confirm this after the talks broke down, when he said the current deal (5.7mb/d of cuts) would stay. This is likely to tighten the market.” 

“As demand has improved, inventories have been falling sharply. We estimate this drawdown could end up being as large as 1.9mb/d in Q3, assuming there are no increases in supply before October. No doubt tightness will continue to raise prices in the short term. We have subsequently raised our short-term (0-3m) target to $85/bbl.”

“The medium-term outlook has become uncertain. OPEC unity till now has helped rebalance the market following the collapse in demand in 2020. That unity is now in question. And that raises the risk that compliance with the production cuts could fall. We don’t think this will lead to abreak-up of the alliance, but it could shatter the perception that OPEC can deftly manage the oil market amid the ebbs and flows of demand as the world recovers from this pandemic.”