In a tight oil market reacting with price gains to concerns about supply shortages, the leaders of the OPEC and non-OPEC nations part of the production cut deal—Saudi Arabia and Russia—hinted last week that easing the cuts was an option that they had discussed and that would be up for talks at the OPEC and allies’ meeting in less than a month.
Oil prices plunged from three-and-a-half-year highs on reports that the Saudis and Russia may add as much as 1 million bpd of supply to offset crumbling Venezuelan production and possible loss of Iranian oil exports with the return of the U.S. sanctions.
Many analysts don’t think the group would add the reported 1 million bpd of supply, but the oil market lapped up the news and concerns about a return to oversupply have dominated the OPEC chatter news flow for nearly a week. As the June 22 meeting is drawing closer, oil prices will likely react to any new hint, comment, or report about OPEC’s efforts to “address consumer anxiety over security of oil supplies.”
The latest of those reports says that OPEC and non-OPEC are set to stick to the production cuts through the end of 2018, but will be ready to “adjust” supply to address possible shortages.
The group of producers part of the pact “is not ready yet to fully lift controls,” a Gulf source familiar with the Saudi thinking has told Reuters, adding that “it is going to be a long-term cooperation for the sake of a stable oil market.”
“However, if any shortage takes place, the producers will coordinate closely and promptly take necessary actions. The OPEC and non-OPEC agreement will remain in place. But the level of the cut may be adjusted if a physical shortage arises,” the source told Reuters.
“I can’t see them putting a million barrels on the market,” Helima Croft, RBC Capital Markets Managing Director and Global Head of Commodity Strategy, told CNBC earlier this week.
The Saudis have to “walk a fine line” between their own revenue needs and helping consumer nations out, and helping the Trump Administration out, according to Croft.
The Saudis may also have to quash discontent and dissent within OPEC over the fact that Saudi Arabia and Russia hadn’t briefed in advance most of the other nations on their ‘easing cuts’ discussions, although both Russia and the Saudis, as well as OPEC’s current president the UAE, affirmed that any decision would be made “collectively.”
Iran and Kuwait are reportedly leading a faction within OPEC accusing Saudi Arabia of capitulating to U.S. and Russian pressure to drive the price of oil down, the Wall Street Journal reported on Wednesday, citing people familiar with the issue.
While it’s no surprise that Iran is against Saudi Arabia’s (oil) policies, Kuwait—often the mediator in OPEC and Gulf issues—reportedly being upset signals that there could be a bigger rift that could derail the alliance, the WSJ argues.
Then, there is the fact that those who suggested easing the cuts—Saudi Arabia and Russia—have the spare capacity to raise production, while many of the others don’t. So if oil prices tick lower on a possible production increase, producers other than Russia and the Arab nations in the Gulf would have nothing to gain—they will actually lose oil revenues.
Analysts think that OPEC is up for a tough meeting in June, and that the Saudis and Russians persuading the others that longer-term stability is preferable to short-term high oil prices will be a ‘tough sell.’
“It’s rational from the point of view of Iran, Venezuela, Nigeria, Libya, Algeria, Angola to oppose,” Nordine Ait-Laoussine, who was Algeria’s oil minister from 1991 to 1992, told Bloomberg.
Yet, it’s likely that Saudi Arabia and Russia will have their way at the meeting in June, Bob McNally, founder of consultant Rapidan Energy Group and a former White House oil official, says.
“The reality is Vienna Group members with spare production capacity will increase production if they wish and those without spare will have to live with it,” McNally told Bloomberg in an email. “If Saudi Arabia and Russia want to increase production they will, and if Venezuela, Iran or others object, then the communique’s language will be vague or silent on the prospective output boost.”
While it’s unlikely that the partners will put 1 million bpd on the market in June, OPEC’s overused “market stability” cliché as proxy for ‘higher oil prices’ or ‘desired oil prices’, will likely make it in every official statement next month. Emboldened by the pact’s success, OPEC and allies aim for longer-term control of the oil market.
In a speech in Azerbaijan on Wednesday, OPEC’s Secretary General Mohammad Barkindo said:
“With the Declaration of Cooperation, we have initiated a new era in international energy collaboration, the likes of which the world has never seen before. What is required is to build upon this model process. We must institutionalize it and expand it even further for a sustainable market stability beyond the short term.”