The 24 petroleum nation alliance known as OPEC-plus will likely lessen the impact of Iranian crude oil cuts following the expiration of U.S. waivers, Fitch Ratings said in a May 24 release.
According to the rating agency, OPEC-plus, comprised of 14 OPEC members and 10 non-OPEC members, can mitigate the impact by ramping output within existing quotas or redistributing quotas and could still keep its overall production in check. Fitch said that since its formation in 2016, the alliance has adjusted its output to offset fluctuating global supply and demand.
At the end of April, OPEC-plus had around 2 million barrels per day to 2.5 million bbl/d of spare capacity, mainly in Saudi Arabia, which could be used to offset Iran's lower volumes while keeping its overall production largely unchanged, Fitch said. The alliance in April reported there was a 168% rate of overcompliance, which is member states exceeding agreed production cuts, and has the ability to increase output by 600,000 bbl/d and still remain within the guidelines set during the December 2018 deal.
Over the next few months, the reduced spare capacity may lead to higher market volatility but since the level of prices also depends on other factors, such as production dynamics in the U.S. along with nations with high operational risks, such as Venezuela, and global demand, Fitch expects Brent crude to average US$65/bbl in 2019, in line with year-to-date prices.
In the long run, the rating agency said the spare capacity would likely normalize even if sanctions on Iran remained in place as many OPEC countries have plans to increase their output despite OPEC-plus commitments. Fitch assumes long-term prices will come back to $50/bbl to $60/bbl.