At the recent Vienna meeting, OPEC+ “compromised” and agreed to increase oil production. Bart Melek, Global Head of Commodity Strategy, TD Securities, explains what higher oil output could mean for Canadian producers and why crude oil prices could rise.
Great to be here.
Now, you weren't surprised with the announcement to increase oil production, Bart. About a week ago, you were expecting an increase of 500,000 barrels. Today, we hear it's 600,000. So you were very close. But what surprised you from what you heard?
Well, what was a bit surprising is that Iran finally signed onto this deal because, as of yesterday, they walked out a little bit upset early in. And we weren't sure if there was a deal on the table. But this morning, we found out that Iran signed on.
There are a few concessions being made by Saudi Arabia that Iran accepted, one of them being that the quota will be expanded for Saudi Arabia, and possibly for Iran, in case it needs to be used. That was a little bit surprising. We didn't think that was a high-probability outcome. But I guess that's what happens when you compromise.
There's also something very interesting that your team follows. And you actually look at the production profiles for countries. So you looked at Iran. You looked at Venezuela. What do you think that their characteristics could mean for other players, and even Canada?
Well, what we're seeing is Venezuela continuing to have a dysfunctional oil industry. And in fact, the entire country is in a lot of trouble. And based on what we're seeing on the ground in Venezuela is a very dysfunctional oil industry which will likely produce less crude than it did last year. That certainly has been the trend over the last year and a half-- big declines in oil output. We suspect that they're going to lose maybe 350,000, if not more, of crude capacity this year-- well, in fact, over the next 12 months or so.
At the same time, we're seeing the possibility of Iran being prohibited from moving as much oil as they would like to global markets. We estimate that could be as much as 900,000 barrels per day. And this is, of course, due to the sanctions that the Trump administration is imposing on that country.
And one thing you have talked a lot about is, we're hearing in the market, at least, some lofty expectations as to where oil prices could go. Some analysts are throwing the number of $100 a barrel out there. What's your expectation?
Well, we're looking for Brent to be at around $80. And we think that's going to be a pretty strong resistance level, both technically and from the perspective of just how OPEC is likely to react and, indeed, how nonconventionals would react to prices above that in any material way. At this point, we expect new capital investment from the shale producers. And certainly, these price levels will make that very possible.
We also think that OPEC would very well not want prices to go much above that. One, it would likely erode long-term demand growth. And on the other side, it would, again, incentivize people outside of the core producers in the world to invest and perhaps eat up market share from OPEC over time.
Bart, thank you very much.
Thank you so much.