During the 173rd Opec+ meeting of November 2017, a group of Opec/NOpec oil producing countries decided to maintain output restraints to keep total production level at 32.5 mb/d, implying overall cuts for 1.8 mb/d in total.
The aim of the cuts – that were to be maintained until December 2018 – was to support prices and allow higher revenues to producing countries, as well as market stability. The deal however envisaged the possibility of ending the cuts before the end of 2018 in case the oil glut was removed and prices increased.
Robust global demand and good level of compliance by OPEC+ members managed to rapidly reduce the oil glut and allow prices to rise, with Brent reaching $ 80 a barrel in May and now being above $ 70 a barrel.
The upcoming meeting of June 22nd will see 24 Opec/NOpec producers engaged in what is expected to be a heated discussion, on whether to maintain or ease the cuts.
U.S. Pressure Looming Over Saudi Arabia
In November, while Russia was openly supportive of an exit mechanism as part of the deal, Saudi Arabia was way more cautious and willing to maintain overall production at 32.5 mb/d until the end of 2018.
Currently, the Saudi Kingdom seems more open to re-discuss an increase in production, mainly because of mounting pressure from the U.S., afraid of the consequences of higher oil prices on domestic economy.
In April President Donald Trump blamed Opec for what he defined as “artificially high oil prices” and affirmed that the US will not accept it. In addition, US Treasury Secretary Steven Mnuchin stated that Washington was trying to persuade oil producers to increase supply with the final objective of offsetting the impact of forthcoming sanctions on Iran, coming as a result of the Trump’s administration decision to leave the Joint Comprehensive Plan of Action (JPOA) in May.
Analysts have not been conclusive regarding the impact of sanctions on Iran’s oil exports. It has been estimated that Iranian output could drop by between 300.000 to 1 million barrel per day, depending on how buyers reach to US reinstated sanctions. As per today, it seems that most of the countries importing Iranian oil – as India for example – are unwilling to follow unilateral U.S. sanctions.
While it is unexpected to see immediate heavy losses of Iranian oil, Venezuelan output has fallen by about 0.65 mb/d since July 2017. The IEA warned that output declined by about 1 mb/d since 2016 to 1.4 mb/d last April, and it could potentially fall below 1 mb/d.
If Russia and Saudi Arabia together with Kuwait and UAE are those capable of increasing production, having relevant spare capacity, they will have to virtually face all the other countries in the OPEC+ group that have little or no spare capacity.
Among those countries, likely to oppose increase in production, there is Iraq, with over 0.3 mb/d of available spare capacity, mostly bound in the dispute between the Iraqi government and the KGR.
Conscious that his country will not be able to increase output, the Iraqi oil minister Jabbar al-Luaibi affirmed that prices are still too low to ease restraints and that Iraq will not accept unilateral decisions from any producers.
The problem for these countries is that allowing quotas consistent with their capacity means conceding market share to those with more spare capacity.
Even though the GCC countries and Russia manage to convince the remaining countries of the group to increase production, it remains to be seen of how much and at what pace.
During a meeting in 2011 Saudi Arabia failed to convince fellow Opec members to increase production to ease prices (then around $ 118 a barrel).
The Saudis then defined the summit as “one of the worst meetings we have ever had.”
Will the meeting on Friday be a déjà-vu?