Why the next OPEC meeting is the most contentious in years
All eyes are on Vienna this week as the OPEC oil ministers gather for their half-yearly meeting. They will be joined by representatives from 10 non-OPEC countries, who agreed to co-operate with the organization in 2016 to curtail production by 1.8 million barrels. In 2015/1016 the oil price went into a tailspin as oil flooded the market in a situation exacerbated by OPEC indiscriminately turning on the tap.
The purpose of the agreement was to reduce the excess oil inventories in the OECD countries back to their five-year average.
Compliance was good from the start and due to geopolitical factors became stunning reaching a near record 177 percent in May. (In its April report even the International Energy Agency acknowledged that the alliance had accomplished its mission.) Prices are up 30 percent from where they were a year ago and when they reached the highs of nearly 80 dollars per barrel earlier in the year they had been up 80 percent from their low point in 2016.
Compliance was aided by geopolitical difficulties in Libya, which recently lost 240,000bpd after skirmishes at the ports of Ras Lanuf and El Cider.
More importantly, Venezuela’s production had been falling off a cliff over the last year. This trend will be exacerbated by the punishing sanctions the Trump administration imposed earlier. Markets also reacted very strongly when the US withdrew from the Iran Nuclear Agreement and announced the harshest possible sanctions on the country.
Earlier this month prices fell when Russia and Saudi Arabia consented to ease production cuts from their end. The IEA also helped sentiment in their June report by forecasting non-OPEC production growth to 2 million bpd for 2018 and 1.7 million bpd for 2019. The agency predicts that 75 percent of that growth will come from the US.
The IEA slightly revised its forecast downwards predicting growth in demand to 1.3 million barrels. The market traded sideways last week in anticipation of the OPEC meeting. Brent stood at $73.16 per barrel in early Monday trading.
The upcoming meeting will be contentious and acrimonious.
So what can we expect from the OPEC meeting? The negotiations will be tough. Some players, namely Saudi Arabia on the OPEC side and Russia on the non-OPEC side, want to increase production to appease market sentiment. They also do not want to lose further market share to ever growing US exports.
Other countries like Venezuela, Iran and Iraq want to keep the production cuts. This is all about not upsetting the hard fought balance of quotas within OPEC, which the ministers have set to support the above mentioned Agreement of Cooperation.
Venezuela has no headroom irrespective of US sanctions. Its production is in freefall due to the dire state of its economy. Iran will soon see its ability to export impacted by US sanctions. Unlike the GCC producers, Iraq has little headroom and fears for its position. Iraq has, for instance, overtaken KSA as the largest crude importer to India. So it came as little surprise when they sent a strongly worded note to Vienna earlier this month.
The upcoming meeting will be contentious and acrimonious. Saudi Energy Minister Khalid Al-Falih, will have to walk a tightrope between securing an agreement within the organization and the pressures emanating from Russia, where Rosneft’s CEO Igor Sechin is rearing to release crude from new-built capacity.
Donald Trump’s tweets criticizing OPEC of artificially pushing up the price of oil, were not helpful at all. The remarks will be seen as incendiary the Iran and Venezuela whose ability to export suffers among other things due to US sanctions.
OPEC decisions need to be unanimous, which makes things even more difficult. There is a precedent: In 2011 when the organization could not reach a compromise to pump more oil. At that time Saudi Arabia went ahead and upped its production anyway.
This time around the situation is more complex, because there is a new kid on the block in the form of ever-growing US exports. Neither OPEC, nor its member Saudi Arabia, nor for that matter Russia will want to give up further market share to the US.
Khalid Al-Falih and Mohammed Barkindo, OPEC’s secretary general, have their work cut out for them aiming to accommodate the hawks and the doves in the organization, while still ensuring that a certain degree co-operation with Russia and the other nine non-OPEC countries continues beyond December 2018 when the current Agreement of Cooperation will expire.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources