After so much hype and anticipation, it seems that the OPEC meeting in Vienna was all but over before it had even begun.
Russia and Saudi Arabia have agreed to extend the OPEC+ production cuts by six to nine months. The production levels remains unchanged, but the timing could be extended through the first quarter of 2020. “We will support the extension, both Russia and Saudi Arabia. As far as the length of the extension is concerned, we have yet to decide whether it will be six or nine months. Maybe it will be nine months,” Russian President Vladimir Putin said on the sidelines of the G20 conference in Japan.
Saudi officials sounded a little more certain. “I think most likely a nine-month extension,” Saudi oil minister Khalid al-Falih said. But when asked if the oil market needed deeper cuts, al-Falih said no. “I don’t think the market needs that,” he said.
Extending the cuts by nine months makes sense because of seasonally weaker demand in the early part of the year. In any event, the group will meet again in six months to reassess, so the precise duration of the extension is almost irrelevant.
That leaves little drama for the Vienna meeting. In fact, even as OPEC is supposed to work by consensus, al-Falih played up the notion that all important decision-making is taking place in Riyadh and Moscow. “The agreement confirms that the Saudi-Russian partnership paved the way to guarantee the interest of producers and consumers and the continued growth of the global economy,” al-Falih tweeted.
That didn’t go down well with the rest of the group. “Who needs an OPEC meeting?,” one irritated OPEC delegate said, according to Reuters.
Still, the rest of OPEC has little choice but to go along with what the coalition’s two most powerful producers decide. Most OPEC members are either producing as much as possible or are suffering from outages. Only a few have the ability to voluntarily hold supply off of the market in any meaningful way. Regardless, they all seem to want higher oil prices.
The only potential spectacle in Vienna was going to be if Iran resisted the process, if only to protest the brutal sanctions regime from Washington and what Tehran sees as Saudi complicity. Iran fought over the scheduling of the meeting, perhaps as a way of demonstrating its relevance. But scuttling the OPEC+ deal would not serve its interests. On Monday, Iran’s oil minister Bijan Zanganeh told reporters that he was on board. “I have no problem with a production cut … It’s going to be an easy meeting as my stance is very clear,” Zanganeh told reporters in Vienna.
He was, though, annoyed at the fact that Putin seemed to be announcing the outcome of the meeting before it occurred. “The important thing to me is that OPEC remains OPEC. It has lost its authority and it’s on the verge of collapse,” Zanganeh said. “Iran is not going to leave OPEC but I believe OPEC is going to die with these processes.”
The important thing from the oil market’s perspective is that the cuts are extended. But that doesn’t mean that OPEC+ has completed its task. While the agreement could be extended for nine months, the OPEC+ battle is a long-term one.
“Being ‘between a rock and a hard place’ has been the description of OPEC’s situation in the run-up to today’s meeting (1 July), losing market share to booming US shale oil production on the one hand, while facing weakening oil demand growth along with slowing global growth on the other,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a statement. OPEC’s market share is set to drop below 30 percent of total global supply for the first time since 1991, according to Bloomberg News. As other non-OPEC supply (largely U.S. shale) continues to grow, OPEC is caught in a perpetual conundrum of having to restrain production in order to prevent a price crash. For now, curtailing output appears to be in the best interest of its members, due to fiscal pressures. But it’s unclear how the cartel ever exits the agreement given rising non-OPEC supply and softening demand. “For Saudi Arabia, the oil policy right now is 100% revenues,” said Amrita Sen, chief analyst at consultant Energy Aspects Ltd., according to Bloomberg. “But if inventories don’t fall and prices don’t rise, the policy is not sustainable.”
U.S. shale production growth could also slowdown, which would make OPEC+’s job a little easier. “US crude production will probably be 0.4m bl/day higher at year end but on average just 0.2m bl/day higher in H2 2019 than in June,” Bjarne Schieldrop said. “So OPEC+ will probably have to produce more in H2 2019 than they did in H1 2019 in order to satisfy seasonally higher demand unless the global economy tanks completely.”
In addition, demand tends to rise on a seasonal basis in the second half of the year. The global economy appears to be slowing, and demand has been lackluster, but the expected seasonal pickup may offset some of that softness. “Thus, if Russia, Saudi Arabia and the other key OPEC members keep production at the levels they produced in H1 2019, they will ensure that the global oil market is not flowing over,” Schieldrop said.