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Dip in crude price represents buying opportunity, says Morgan Stanley, which sees market tightening ahead

Last updated: 08:59 20 Jul 2018 EDT, First published: 03:59 20 Jul 2018 EDT

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Higher oil production may be driving prices lower for the benefit of consumers, but the market remains volatile as investors ponder their next move.

In early trading on Friday, Brent crude was priced above US$73 with WTI around US$70 a barrel.

The international crude oil benchmark dropped more than 6%this week as Saudi Arabia delivered more oil to the market.

American production strong

American production remained strong with more than 11mln barrels a day hitting the market, according to the US Energy Information Administration.

The EIA said the rapid increase in shale drilling is adding to the market. Domestic inventories were also higher last week, adding to the abundant supply on the market.

Saudi Arabia is reported to have added about 500,000 additional barrels a day to the market last month.

A report from Dow Jones said that the country’s OPEC governor Adeeb Al Aama said they will keep exports in line with last month and not oversupply the market.

This news kept prices stronger by the end of the week. Oil exports from Saudi Arabia in June were estimated around 7.2 million barrels a day.

OPEC continues to monitor the market over the summer as it aims to reach 100 percent compliance.

The Joint Ministerial Monitoring Committee held its July meeting as a tele-conference and reported compliance of 121% for June.

Following June's agreement to add more oil to the market, the organisation committed to ensure that “overall performance will not deviate from the 100%conformity” agreement reached this summer.

Despite the reality of more oil on the market, leading analysts still caution about tightness.

Morgan Stanley sees US$85 a barrel

Investment bank Morgan Stanley predicts that oil might reach US$85 a barrel by the end of the year as the big story is a geopolitical one.

“Ahead of sanctions on Iran, several other OPEC members have increased exports sharply,” said the research report, adding “the timing mismatch between these effects is pressuring oil prices".

Morgan Stanley says it sees the oil markets tightening in coming months, but adds that this dip in price presents a buying opportunity currently.

More oil can be expected from other suppliers and according to S&P Global Platts, Russian producers could deliver an additional 600,000 barrels a day by next year.

That would match American production of 11mln barrels a day.

The fall-out of sanctions on Iran is yet to be determined, but the US Treasury Secretary, Steve Mnuchin said while he was committed to zero Iranian oil imports on the market, he might be willing to look at exemptions for a transition period.

He also suggested that the US could tap its strategic petroleum reserve at any time.

Geopolitics dominate market

Geopolitics have dominated the market in recent months and according to PVM Oil Associates, this will continue.

In a report this week, the analysts said that “political and economic events are shaping the oil market in a way that they have not shaped for quite some time,” adding that “uncertainties” surrounding global oil supply and demand continue to rise, almost on a daily basis.

With such nervousness in the market, producers and investors will be watching the market with even greater scrutiny. It’s a wait and see game as players hope for more positive news.

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