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Brent/WTI spread narrows sharply in wake of OPEC output deal

New York — The oil complex surged Thursday, taking many in the oil world bysurprise after OPEC and its 10 non-OPEC partners put aside politicaldifferences and agreed to adhere to 100% of their production cuts,effectively boosting global supply.

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Prompt NYMEX August crude led the way, settling $3.04 higher at$68.58/b. ICE August Brent lagged slightly, settling $2.50 higher at$75.55/b.

The rally came as a surprise because even though no firm numbers werespecified in the meeting communique, analysts expect around 770,000-800,000b/d of crude supply will come back onto the market, a largely bearishdevelopment.

And with the bulk of the output increase likely coming from SaudiArabia, Kuwait, UAE and Russia, the oil complex is likely pricing inconcerns about spare capacity. This partly explains the stronger responsefrom WTI, as US crudes could be called upon to plug the remaining holes. Theprompt Brent/WTI spread narrowed to $5.85/b on ICE in US afternoon trading,its tightest since May 18.

And with agreed-upon volumes now clearer, the market is likely pricingin the bullish impact of Libyan fighting, which has seen around 450,000 b/dof export capacity compromised in the last week.

The Libyan National Army has retaken the key eastern oil terminals ofRas Lanuf and Es Sider that shut 450,000 b/d of crude production, the headof the state-owned National Oil Corp. said Friday.

"OPEC was able to overcome objections by Iran and others to productionincreases by framing their decision as a return to the originally agreed 1.8million b/d cuts," S&P Global Platts Analytics said.

"The deal calls for a roughly 1 million b/d increase in allocations, inline with our expectations. But not all countries will be able to increaseproduction, and S&P Global Platts Analytics expects a net realized outputincrease of around 700,000 b/d, largely met by Saudi Arabia."

And since not all countries in the OPEC and non-OPEC coalition havespare capacity, and those that increase production per the new agreementwill lose their extra capacity, the market would be susceptible to anysupply interruptions, according to Price Futures Group senior analyst PhilFlynn.

"I think the market is waking up to the fact that [the increase] is notgoing to be enough to fill the looming supply gap," Flynn said. "Also, spareproduction capacity with any increase is almost nonexistent."

Credit Suisse analyst Bill Featherston said in a note that the outcomeand ensuing revised supply and demand balances imply a tight market.

"We've adjusted our model to reflect the quota changes, extendedVenezuelan declines to 800,000 b/d by YE19 (from 1.4 million b/d currently),and assumed a ~0.5 million b/d reduction in Iranian exports in 2019,"Featherston said. "While maintaining 2018-19 YoY oil demand growth of 1.6million b/d and 1.3 million b/d, we now forecast inventory draws in 2H18 of0.5 million b/d leaving OECD inventories 85 million barrels below thefive-year avg and just 100 million barrels below the 2010-14 average when oilwas >$90/b. In 2019, we forecast a relatively balanced market."

NYMEX July RBOB was up 4.27 cents at $2.0550/gal and July ULSD was up4.34 cents at $2.1135/gal.

--James Bambino, james.bambino@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com