Despite disagreements leading up to the June 22 meeting of OPEC in Vienna, the cartel and its Russian-led allies agreed to a ‘substantial output boost.’ It presents a victory to Saudi Arabia and Russia, the twin giants that have been the leading proponents of a supply hike over the past month, as the alliance sought to reassure markets that any shortfall in OPEC production will be made up within their ranks.
The framing of the new deal also allays Iran and Iraq’s concerns over appeasing US President Donald Trump’s concerns that oil prices were too high by framing it as a ‘return to 100% compliance’ rather than an official output boost. In practice, this should mean that since countries like Venezuela (and to a lesser extent Angola, Libya and Algeria) have been producing far less than their production quota due to various forms of disruptions, boosting them back up to agreed levels would achieve a natural gain of some 1 million b/d. The original deal brokered in November 2016 was for a cut 1.8 mmb/d, but disruptions in those countries have deepened it to 2.8 mmb/d over the past three months. Though there seems to be some disagreements between the Iranian and Saudi Arabian oil ministers, it seems that the pro-rata quota reallocations were not going to be strict since ‘some countries…. are not going to be able to produce’, allowing players like Saudi Arabia to step in to fill the gap.
The figures being bandied about are a one million barrel per day increase across OPEC and NOPEC, and a specific increase of 200,000 b/d for Russia within that figure. Saudi Arabia said it would increase output by ‘hundreds of thousands of barrels’ but exact figures would be decided later, implying a looser approach to the details and a focus on achieving the supply boost first and foremost. But more interestingly beyond the deal is the long-term implications of a cooperation entering its second year.
Both Saudi Arabia and Russia have been pushing for the creation of a new body, bringing together the 24 members of the OPEC and the NOPEC alliance under what is being called the OPEC+ umbrella. This would bring in countries like Malaysia, Oman, Bahrain, Kazakhstan and Mexico into a formal alliance with OPEC. For Russia, this is a sign of increased clout – given that the new body is said to give more voting power to large producers. For Saudi Arabia, it dilutes the influence of its rival Iran in world oil supply management, which has scuppered many deals in the past. A suggestion by Russia in Vienna that a ‘crude output deal’ for 2019 was already being planned implies that the creation of OPEC+ might be sooner rather than later. Saudi Arabia is said to already have offered to host talks for OPEC+ at home. The new body could prove to be as effective as OPEC has in the past; or it could fizzle out the way the Russia-led Gas Exporting Countries Forum has. Either way, the next six months in oil should be very interesting.
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Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions