On 22 June, the main oil-producing countries outside the developed world met in Vienna to discuss a potential increase in production quotas. Much speculation and discussion followed the contradictory messages from Saudi Arabia, on the one hand, which favours a moderate increase, and Russia on the other, which wanted to expand quotas more significantly.
The agreement eventually reached was closer to the Saudi position, with the addition of 1 million barrels/day. However, this increase is only theoretical, as some countries may not use their quotas, thereby limiting the real boost to output to around 700,000 barrels.
This figure should also be seen in context, given the successive supply shocks that have been affecting the oil market for several months now. Venezuela and Libya are being impacted by specific issues limiting their oil supplies, and Iran is likely to be affected before long too. It is estimated that these three countries have contributed or will contribute to a reduction in oil output of around 1.3 million barrels in 2018. Moreover, there has also been a sharp increase in US shale oil production, although this has been offset by the rise in global consumption.
The oil market is ultimately still suffering as a result of a shortage of supply, and while the agreement reached on 22 June should reduce the shortage, it will not fill the gap completely. Unless there is a major slump in growth, which would reduce demand for oil, it is hard to see the barrel oil price falling significantly from its current levels. Nor do we think that Donald Trump's request to Saudi Arabia to increase production will be wholly successful: the Saudis have every interest in keeping the barrel price high ahead of the Aramco IPO planned for 2019.
The high barrel price is a good thing for one of our key themes, inflation breakevens – with the base effects continuing to be positive in the coming months. In the longer term, however, this is not good news for the growth of importing countries, such as the European nations or Japan.
Despite our strong conviction on inflation, our bets are currently fairly limited in view of the current uncertainty over global trade. We could be in for a somewhat volatile summer...
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