OPEC’s May 25 meeting, at which ministers will consider extending their production cut agreement, is now a month away. Most signals currently point towards an extension for at least another three months. However, there are still some reasons to be doubtful.
An extension of the deal would likely cause a short-term bump in the price of and, at minimum, stabilize prices in the the low $50/barrel range. A failure to extend the deal could cause oil prices to drop significantly.
Recent signs in favor of an easy extension include the following:
- Saudi oil minister Khalid al-Falih (the most powerful member of OPEC) told a press gathering in Abu Dhabi last week that despite “a strong level of commitment in the past three months,” OPEC and non-OPEC countries have not yet reached their goal of drawing down global inventories. Al-Falih has previously indicated that OPEC’s goal is to bring global inventories down to the five-year average. At the end of February, stocks in OECD countries measured 336 million barrels above that target. This suggests Saudi Arabia will seek to extend current cuts for at least another period of three to six months.
- The energy ministers from the Gulf States (Saudi Arabia, Kuwait, Bahrain, Qatar, the UAE and Oman) signaled that they had reached a preliminary agreement to extend the production cut deal. Bahrain and Oman are not OPEC members, but they joined the production cut deal along with nine other oil producing countries last December. It seems as though these countries intend to build a broader consensus among producing countries using this preliminary agreement as a basis. Details of the agreement, however, have not been made public.
- At last week’s OPEC/Non-OPEC Joint Technical Committee meeting in Vienna, members recommended that the production deal be extended for an additional six months after it expires in June. Representatives from Kuwait, Venezuela, Algeria, Russia and Oman considered production levels from all participants and concluded that although compliance with the cuts improved over the past two months, the deal should still be extended to help resolve the ongoing glut of .
On the other hand, there are signs that some key producers are skeptical of a deal extension. These risks come from some of the largest producing countries and could endanger the success of a deal to extend production cuts.
- Russian energy minister Alexander Novak has indicated that he will attend the next OPEC meeting to discuss extending the production cuts, but he has not yet signaled whether Russia sees a need for such an extension. Russian agreement and participation was key to OPEC’s consensus agreement last November. At the time, Russia agreed to cut 300,000 bpd before any other non-OPEC producers agreed to production cuts. There has been some tension between Russia and Saudi Arabia over Russia’s failure to fully implement its assigned cuts over the past several months, and it seems as though Novak will face a serious challenge convincing Russian companies to agree to extend their cuts. Right now, Russia’s agreement and compliance is the most significant threat to an extension of the production cut deal.
- Iraq, the second largest producer in OPEC, was very critical of the initial OPEC production cut deal and unsuccessfully sought an exemption. Iraq initially cut production during the first few months of the year. However, in March Iraq increased production. Convincing Iraq to sign on to a three or six month extension of the deal will be difficult but crucial. OPEC only adopts policies by consensus. The leader of Iraq’s ruling coalition recently said: “it is the right of Iraq to hope for an exemption by the other OPEC member states.” Currently only Nigeria and Libya are exempt from OPEC production cuts, and Iran has a lesser burden. It will be an uphill battle for Iraq to negotiate an exemption, but Iraq’s insistence could threaten an OPEC consensus.