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Higher fuel prices have been essentially decided. Bad news for drivers [CINKCIARZ.PL ANALYSIS]

The OPEC countries announced that they will limit oil mining at their meeting in November. This caused oil to increase by more than 5%. However, this is not all negative information for drivers. If the production is actually decreased, the oil price may grow significantly. A comment from Marcin Lipka, Cinkciarz.pl analyst.

Marcin Lipka, Analityk Cinkciarz.pl

The recent news from the oil market was not positive for oil producers. According to the previous report from the International Energy Agency (IEA), the demand for oil in the third quarter was increasing at the slowest pace in two years. Moreover, the IEA has clearly increased the scale of oil’s global oversupply. It is to amount approximately 500k barrels per day, until the end of the second quarter of 2017.

The above information was increasing the likelihood of the oil price remaining within the range of 40-50 USD per barrel. This indicated that Polish drivers would buy fuel and diesel for 4.00-4.50 PLN per liter. Due to information from Algeria on Wednesday, this scenario is basically out of date.

Lower mining equals higher prices

Expectations before the OPEC discussions during the International Energy Forum (IEF) were not high. Investors were expecting the Cartel to sustain its strategy of increasing production, as well as its contribution within the market, which would support low prices (at least until the mid-2017). However, the situation changed significantly on Wednesday evening.

It began with the Algerians declaring an offer of a limit in mining to approximately 800k barrels per day. Later, the OPEC officially claimed that the Cartel will decide for a decrease in production within the range of approximately 250k-750k barrels per day at the meeting on November 30th.

Theoretically, this is not a large amount, taking into consideration that the global production is at the level of 96 million barrels per day. However, the oil market is very fragile for even a minor change in supply and demand. Therefore, the oil price increased by more than 5% already this week.

Perhaps there will not be a production limit?

Some of the market observers don’t believe that the declarations from the IEF would become a fact. They think that it’s unlikely that the OPEC will establish a compromise at the end of November. The purpose of the Cartel’s current actions is to raise prices temporarily, in investors’ opinions.

Of course, we can’t exclude this theory, taking into consideration the Cartel’s history. However, there are at least two arguments for the pessimistic scenario. Primarily, the OPEC agreed on an increase in production by Iran, Nigeria and Libya, despite that the other countries will reduce it.

It was mostly Iran that didn’t want to agree on a decrease in mining during the meeting in Doha in April. This was because this country still didn’t fully regain its contribution in the market from before the sanctions. Currently, this problem has been solved. Another argument for an increase in oil supply (at least temporarily) is an estimated balance of the market for the second half of 2017.

The agreement would simply accelerate the balance between demand and supply by six months, as well as clearly reduce the risk of a decrease in oil price below 40 USD per barrel if the winter conditions are unfavorable for the producers. At the same time, the Cartel is aware that a larger reduction of supplies will be unfavorable, because it would increase the mining in the United States. This would result in a reduction of profits of the OPEC countries. Therefore, a scenario of a relatively mild return to a balanced markets seems quite likely.

What price will drivers pay?

The European Commission’s data states that the average retail price of unleaded 95 fuel was 4.40 PLN per liter and the average retail price of diesel was 4.22 PLN per liter. However, it appears that both of these products will cost approximately 0.10 PLN more in the forthcoming days. This is because the ARA 95 fuel (Amsterdam-Rotterdam-Antwerp) increased from 486 USD to 522 USD per ton in two days (from 1.40 PLN per liter to 1.51 PLN per liter). Diesel also became significantly more expensive. Its price in ARA shipyards increased from 1.39 PLN to 1.47 PLN per litre.

However, this is not all bad information. If there actually is a limit in oil mining at the end of November, we may expect the oil prices to move from the range of 40-50 USD per barrel to 50-60 USD per barrel. This would also mean a significant increase in fuel prices in the ARA market.

As a result, taking into consideration the relation between prices in the wholesale and the retail markets, we can expect fuel to become 0.20-0.30 PLN more expensive in winter. This means that it will be very difficult to find gas stations that offer diesel which is cheaper than 4.50 PLN per liter. Unleaded 95 fuel will probably cost 4.70-4.80 PLN per liter.

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