OPEC is expected to start tapering the output cuts in early 2019 increasing the supply of medium and heavy oil into the market to rebalance the market, according to Bank of America Merrill Lynch (BofAML).
"We project the OPEC cartel and Russia to start tapering back the agreed 2016 production cuts in early Q1 2019 at a rate of roughly 120,000 barrels per day (bpd) per quarter," the report estimated.
"A combination of increased Canadian barrels and more OPEC and non-OPEC tapering in the context of a rising crude oil market should add pressure on light-heavy spreads," it noted.
On top of the incremental US shale supply, BofAML expects oil output growth next year to be a combination of medium and heavy Iraqi, UAE, Saudi, and Russian barrels.
Brent-Dubai spreads, which narrowed down to about $1 per barrel by the middle of 2017, have started to price in a return of OPEC medium-heavy barrels on a forward basis.
The spread could widen further as more barrels come out of the Middle East, the report noted.
Meanwhile, the bank said that Saudi crude grade price ratios have historically widened sharply every time that OPEC has increased production.
"This time should be no different, although we would also argue that increased OPEC/Russia cooperation (i.e. a 2019 supply cut deal extension or very limited tapering) could keep Brent-Dubai spreads under $4 a barrel next year," it said.
On Tuesday, US President Donald Trump abandoned a nuclear deal with Iran and announced plans for the “highest level” of sanctions against the OPEC member.
Saudi Arabia energy minister Khalid Al-Falih on Wednesday assured to work closely with major OPEC and non-OPEC producers to lessen the impact of any supply shortages.
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