After touching $75 a barrel, Brent has been hovering in the $72-74 range since the beginning of this week.

Geopolitical conflicts in Iran and war of words between Washington and Tehran is certainly seen impacting the market in addition to statements made by important OPEC members such as Saudi Arabia.

The big question is whether the OPEC+ production cut agreement will be extended or whether oil production will be raised. A consensus seems to be eluding producers; but they are keen that prices do not crash because of their decision.

The OPEC+ meeting, scheduled for end-June in Vienna, may prove to be crucial.

To cut or not to cut...

Several scenarios are possible. Extend output cut agreement or abandon it or reduce the quantum of output cut from 1.2 million barrels a day to say 800,000 or 900,000 barrels a day. It is believed that several OPEC members are not in favour of raising production.

However, having broadly achieved the output cut objective, producers may find themselves under pressure to reduce the agreed quantum of output cut, if not end it. Pressure may come from the White House.

Russia could be a dark horse. As is known, Russia is not happy with the output cut and wants to keep all options open.

According to the International Energy Agency, in April, Russia cut its production by 190,000 barrels a day while the agreed quantum of cut was 230,000 barrels a day.

On the other hand, Saudi Arabia has spare capacity to raise production. Meanwhile, shale output in the US continues to rise and is on track for a 16 per cent growth in 2019 to 1.2 million barrels a day, said a report.

Most recently, there is some signal that OPEC+ is willing in principle to raise oil production in the second half of the year given that the market is facing supply shortages. How it actually pans out will be known in its next meeting.

The US conundrum

However, in the near-term, geopolitical pressures are expected to hit the oil market. In addition to OPEC+ agreed output cut, sanctions on Iran and supply outage from Venezuela are playing their part.

No wonder, speculative capital has moved in and is seen pressing the market higher. Prices are likely to make a renewed bid to reach April highs. Floundering trade talks between two of the world’s largest economies — the US and China — are also seen adding to the uncertainty. More often than not, there are no winners in a trade war. China’s April data suggest softer activity and negative sentiment. As a response to slowdown, China can potentially announce a stimulus package which can support the energy market to an extent.

Looking ahead, consensus over possible global economic slowdown and its impact on energy consumption growth is rapidly emerging.

In such an event, crude oil market will be the first to be affected, and there could be a steep correction in prices especially when speculative long position holders exit the market.

Price outlook

In the event, Brent may fall below $70 a barrel. Until then, major importers such as India and China will have to brace for firm crude prices. What strategic approach the incoming government in New Delhi would take remains to be seen; but consumers will be hit for sure.

The author is a policy commentator and commodities market specialist. Views are personal.

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