Oil ministers at the crossroads

Oil ministers at the crossroads

Oil ministers will find themselves at a crossroads next week. Market-watchers are already speculating over possible outcomes when ministers gather at OPEC on June 22-23. Will it be the worst gathering since 2011? Or will it confound expectation and be a resounding success — or just two days of plain old prevarication?
The first scenario anticipates ministers disagreeing on the Russian request for OPEC and its allies to increase production.
The alliance known as OPEC+ had agreed in late 2016 to cut their production by a total 1.8 million barrels per day (bpd) starting from January 2017.
The last time ministers met in November, they agreed on extending the cuts through 2018 with an option to adjust the deal at next week’s gathering “based on prevailing market conditions and the progress achieved towards rebalancing of the oil market at that time,” according to the official communique.
Until the last week of May, the general thinking that prevailed among OPEC ministers was that they would have an easy meeting in June, agreeing with their non-OPEC counterparts to maintain the production cuts until the end of the year.  
But Russia changed its mind at the eleventh hour.
Russian officials are now asking OPEC to increase production by around 1 million bpd in order for the conformity level with the cuts to fall to 100 percent from the latest 152 percent achieved in April.
The rationale behind this sudden change was stated by President Vladimir Putin. First, the market is rebalanced now, second, the current prices of oil are high for consumers, and third, the right price of oil should be around $60 per barrel.
Saudi Arabia, a close ally of Russia, signaled that it is ready to cooperate but not all ministers in OPEC appear to be on the same page.

The lack of enough spare capacity within OPEC may leave the few countries with idle production to benefit most from an output hike.

Wael Mahdi

Iraq, the second largest producer in OPEC, and Ecuador made it public that they do not support the end of the cuts. Iran and Venezuela may join the opposition camp as they both sent messages to OPEC to express their displeasure with the sanctions imposed on them. Iran’s OPEC governor has already said that OPEC may reject an output increase because the idea originated in the US.
It seems fair to say that tension will be a given next week.  We already know that some OPEC countries will not be happy with an output hike that will lower prices.
Secondly, politics will shape the decision at the meeting to a large extent. Thirdly, some OPEC countries are not happy with the rhetoric coming from some members ahead of the meeting.
Finally, the lack of enough spare capacity within OPEC may leave the few countries with idle production to benefit most from an output hike.
The Russians are not waiting and have already lifted output above the level agreed under the deal in the first weeks of June, according to media reports.
So the agreement could stay in place but with everyone doing whatever they like regardless. Saudi Arabia may raise output to calm customers’ fears of any supply shortage. Few Gulf producers will do the same but the market will still see a shortage for some time.
The second scenario is for the meeting to be successful, which will require a lot of political leverage by Russia and Saudi Arabia to convince others to agree on a gradual hike in output of less than 1 million bpd — ideally around 500,000 bpd — to avoid a sharp correction.
This would be an ideal solution to keep everyone happy. The problem is that non-OPEC supply may increase this year by 1.86 million bpd while demand is at 1.65 million bpd, so increasing OPEC supply may create some surplus in the market by year end.
The last scenario is to kick the can down the road. Do nothing for now and hold an extraordinary meeting in September — or agree in principle on a hike but meet again in September to decide how much that should be when the supply-demand picture of the year is more clear.

  • Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
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