OPEC, the cartel of petroleum exporting nations, will be meeting this week in Vienna. As recently as 2016 and 2017, the cartel was declared “dead” by some experts, but today it seems reinvigorated, once again a central driver of the oil market. As such, here's what to keep an eye on as the meeting commences:
According to the International Energy Agency (IEA), the global oil glut that caused prices to plunge in 2015 and 2016, has been resolved. In fact, the IEA warned that unless OPEC increases oil production, growing demand in 2019 will make the market “vulnerable to prices rising higher.” Even the UAE oil minister, who is currently serving as the President of OPEC, said this week that the oil market is close to rebalancing.
Thus the question before the fourteen member countries at the upcoming meeting will be whether or not to increase oil production starting in July.
According to Thomson Reuters, OPEC’s total oil output in May was 32 million barrels per day. This is over 700,000 bpd below OPEC’s production targets. Libya and Nigeria have experienced intermittent disruptions to oil exports, and new fighting in Libya promises to disrupt oil production and exports for the foreseeable future. However, Venezuela is responsible for the largest declines in production. In May, Venezuela’s oil output hit new lows. According to Platts, Venezuela produced only 1.36 million bpd, down from its allocation of 1.97 million bpd. There are serious indications that Venezuela’s production will continue to decline. The U.S. Energy Information Agency (EIA) and the IEA both believe Venezuela’s oil production will drop below 1 million bpd as soon as June or July and that these disruptions will push oil prices higher in the second half of 2018.
Saudi Arabia and Russia, the cartel's key producers, showed interest in raising oil production when oil ministers Khalid al Falih and Alexander Novak met at the St. Petersburg Economic Forum on May 25. The two ministers have reportedly come up with a proposal to incrementally increase oil production over the rest of 2018. A range of possibilities have been mentioned, including increases of 300,000 bpd (less than 1% of total OPEC and participating non-OPEC production), 500,000 bpd per day, 700,000 bpd, 1 million bpd and 1.5 million bpd. The idea would be to gradually raise production to offset losses from Venezuela and other OPEC members who are facing involuntary declines.
Iran is loudly protesting any increases in production because the new US sanctions will make it difficult for the country to sell the oil it already produces. Iran is already forced to sell its oil at a discount and production increases across the board would only hurt the country’s revenue even more. It also feels snubbed by its fellow OPEC members after OPEC rejected Iran’s request to support Iran against the new U.S. sanctions.
Iran’s OPEC governor said on Sunday that, “If the Kingdom of Saudi Arabia and Russia want to increase production, this requires unanimity. If the two want to act alone, that’s a breach of the cooperation agreement.” He also said that, “Three OPEC founders are going to stop it,” (referring to Iran, Iraq and Venezuela).
This does not necessarily mean that Saudi Arabia and Russia’s proposal is dead on arrival. OPEC members often make strong statements such as these before meetings and then are able to find compromise in Vienna. No country wants to permanently ostracize itself from the power that comes with OPEC membership.
Iraq also opposes any across the board increase in production. However, Iraq has been overproducing beyond its allocation since the production cuts began. According to Platts, Iraq produced 4.47 million bpd in May, which is 0.12 million bpd over its production allocation. Given that Iraq has requested an exemption from the production cuts at almost every OPEC meeting since November 2016—when the cuts were first approved—it is safe to say that Iraq really does want to produce more oil. It's just that Iraq wants to be the only one producing above its allocation.
Kuwait and the UAE have been largely silent so far, but they are likely to support Saudi Arabia’s proposal to gradually increase production in some way. Hot tempers and strong language heading into an OPEC meeting are not uncommon. There will be three days of meetings this week. First, countries that sit on the Joint Ministerial Monitoring Committee (JMMC) will meet on Thursday and evaluate compliance and production rates. OPEC will hold its meeting for all governors on Friday, and then the non-OPEC ministers will join for the joint meeting on Saturday.
According to the Ecuadorian oil minister, Russia and Saudi Arabia have proposed a joint OPEC and Non-OPEC production increase of 1.5 million bpd. However, given that most producer nations other than Saudi Arabia, Russia, the UAE, Kazakhstan, and Ecuador don’t have much spare capacity, actual increases would be less than 1.5 million bpd—if this proposal is adopted.
Meanwhile, Saudi Arabia's al Falih continues to push for what he considers a “reasonable and moderate” but “inevitable” agreement to increase oil production.
The market seems to expect an increase in oil production from OPEC and Russia, so if no agreement to raise output is reached, oil prices will certainly jump. On the other hand, there are indications that, regardless of the organization’s decision on Friday, certain producers may open the taps in coming months.
Author's Note: For an extended look at how OPEC and Russia will impact the oil market, check out the Energy Week Podcast.
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