Opec meeting starts in Vienna today
Iran, which was opposing any new changes, will accept a modest production rise
UAE Minister of Energy Suhail Mohammad Al Mazroui speaks to the media ahead of a meeting of Opec oil ministers in Vienna. Opec and its allies are meeting today and tomorrow to decide on increasing production as rising crude prices threaten global growth.
The world’s top oil producers are set to increase production to stabilise oil prices despite opposition from Opec member countries like Iran, Venezuela and Iraq, analysts said.
The Organisation of Petroleum Exporting Countries, along with non-member countries like Russia, are meeting today and tomorrow to chalk out a strategy on output increases as major consumer countries voice concern over higher oil prices.
This will be the first time since the production cut agreement came into effect in January 2017 that the participating countries would be considering an output rise to control spike in oil prices that is denting the growth of the world’s economy.
“Opec will reach consensus on raising production in order to reduce the over-compliance to the deal caused by the ongoing collapse in supplies from Venezuela. They will raise production by between 300,000 and 600,000 barrels per day while maintaining the production ceiling,” said Ole Hansen, head of commodity strategy at Saxo Bank. He also said Iran, which was opposing any new changes to the production cut deal, will accept a modest increase in output. Ehsan Khoman, director, head of research and strategist for the Middle East and North Africa (Mena) at MUFG Bank said prices are approaching the point where they are becoming a concern for consumers as well as for producers.
“We believe that a sustained period of Brent above $80 per barrel and $75 per barrel for WTI [West Texas Intermediate] will lead to demand destruction becoming more likely, through a combination of enhanced efficiency and a slowdown in the global economy,” he said adding that prices are expected to be impacted with the oil producers intending to increase output.
Khoman predicted oil will fall by $3 to $5 per barrel in the third quarter if there is a gradual increase of 350,000 to 700,000 barrels per day and by $5 to $7 per barrel if there is a stronger increase of 700,000 to 1.72 million barrels per day.
A decision to bring back all or close to all of the about 1.72 million barrels taken off the market, by countries that have spare capacity predominantly, Saudi Arabia, the UAE, Kuwait and Russia will have a downward impact on oil by$7 to $10 per barrel.
Their national teams are not known for their football prowess, even with Russia having shut out Saudi Arabia in the World Cup opener. But working as a team they certainly have been exercising their clout on the global oil market.
Vladimir Putin hosted the young Crown Prince of Saudi Arabia Mohammad Bin Salman before the big match in Moscow for what one could call the World Cup of oil diplomacy. Sources in both camps told me there is now complete alignment on the path ahead for their Opec and non-Opec agreement. The so-called petro-alliance, formalised at the end of 2016, cut supplies by 1.8 million barrels a day, and to the surprise of many, brought 24 countries together to rebalance the market.
The International Energy Agency in its latest report said that total surplus supplies are running near the all-important five-year moving average.
Crude prices surged to $80 a barrel the third week of May, but that is when it started to get more complicated. US President Donald Trump took to Twitter and for the second time in a month tried to influence the upcoming proceedings of the oil producing states in Vienna. “Oil prices are too high; Opec is at it again. Not good!” declared Trump despite assurances from Saudi Arabia that it remains keen to maintain an equilibrium in the market.
The Saudi-Russia alliance began telegraphing its next move during the annual gathering of the St. Petersburg International Economic Forum just a few days after the US President sent out his first tweet about Opec. With his Russian counterpart Alexander Novak, by his side, Khalid Al Falih outlined their intentions during a round-table I chaired.
“We will do the right thing. We will make sure that markets are well supplied; we will make sure that consumers’ anxieties are addressed and at the end of the day it is a balanced market,” he said. After leaning on him with a followup question to provide more specific guidance Al Falih added, “Whether it is a million barrels more or less we will have to wait until June to make that announcement.”
For Saudi Arabia and Russia, it is now a game of managing market expectations. After the meetings in Moscow, “gradual” has become the watchword for the 24 countries involved in the overall agreement. There is discussion to add a half million barrels at the start of the third quarter, see how the market responds, and make a gradual contribution of crude on an “as needed” basis.
Opec clearly does not want to be seen responding to pressure from the White House, specifically the tweeting of the US President.
“It is not like we are doing things because this country or that country told us to do it, the group is independent,” said Suhail Al Mazrouei, the UAE Ministry of Energy and the current president of Opec during an interview in Abu Dhabi.
There were reports that the US, after the initial tweet from Trump, opened a back channel of communications to influence Opec decision making, an accusation that Mazrouei suggested was without merit. “I can tell you there is no truth in that whatsoever, never received anything,” he noted. “They would never communicate to us directly or indirectly ‘to do this or do that’ but we take into consideration what is happening in certain markets,” he added.
Three of the world’s biggest importers — the US, India and China — have lobbied for policy changes. India’s Minister of Petroleum recently said before a large audience in Abu Dhabi that $80 a barrel was “pinching” the fast-growing economy. There’s also pushback within Opec from Iran and Venezuela, both founding members, who do not want to see Trump exerting influence over the organisation especially being subject to US sanctions. Iran recently expressed its displeasure by writing to the organisation, wanting to debate the issue at the next gathering.
“The history of the organisation is not to make it political. That is a view that I have and many others share that view,” said the Opec President, making a reference to organisation’s de facto leader and largest producer Saudi Arabia.
Mazrouei said that the group needs to focus on its mandate, which is balancing market supplies with demand. Opec seems unmoved by the rapid increase in US output by shale producers to a record 10.9 million barrels a day. “Imagine if they are not there? We would be probably in an environment that is not very healthy for the global economy,” he added.
Meanwhile back in Moscow, the meeting between Putin and the Saudi Crown Prince illustrated when it comes to oil, the two plan to stay in the great game together. “I think the whole world has benefited from this cooperation,” said Mohammad bin Salman.