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VIENNA, AUSTRIA – May 31, 2016 – Greetings from Vienna where I have arrived over the weekend in preparation for this week’s OPEC meeting on June 2. Several months ago, we forecast not to expect any policy change at the June meeting, and we do not have a different view now.
However, we see Thursday’s meeting as important for gathering potential signals about what OPEC, and in particular, Saudi Arabia might do as it approaches the December meeting amid declining US and non-OPEC production. While we are not predicting a policy change at the year-end meeting in December, we do believe it may be under consideration for the first time in two years. Much will depend on reductions in US, other non-OPEC and perhaps even OPEC (i.e. Venezuela) production in the fall.
The June meeting is also important for two other reasons. Primarily, it will be the first OPEC meeting since nuclear sanctions against Iran have been lifted resulting in an additional 700,000 barrels a day (b/d) in Iranian crude exports to the market in April. You may recall that since December 2015 we have been bullish at Iran’s re-entry to oil markets and forecasted Iranian crude exports to increase by 700,000 b/d in March. We were off by one month but it's safe to say that the speed of Iran coming back to the market has surprised most observers. These developments are significant because Iran is focused solely about getting its own market share back post-sanctions. Therefore, it is very unlikely that there will be any agreement on an OPEC policy change until Iran meets certain internal production and export objectives.
In addition, as we saw at the April Doha meeting, the Saudis are standing firm that all members, most especially Iran, must participate in any production policy change such as a freeze. We don’t expect the Saudis will change this view going forward regarding any future coordinated OPEC action on production.
The other chief reason we are closely monitoring Thursday’s OPEC gathering is that it will be the first meeting to be attended by the new Saudi Arabian Energy Minister Khalid Al-Falih. As the former CEO of Saudi Aramco, Al-Falih is well known to the energy community but we will be watching the new minister for signals about what the Kingdom may do later this year when non-OPEC production should have declined significantly.
The Saudi delegation arrived late Monday night and has already thrown a surprise to reporters. Several pre-meeting press articles profiling the new minister predicted that he will be more out-spoken and transparent than his predecessor. Reporters who were staked out in the Park Hyatt hotel lobby expecting comment from the arriving Minister on Monday night were disappointed that he slipped in through the hotel’s back door. Likewise, he departed the hotel this morning again through the back entrance without comment. Many reporters on Twitter expressed surprise that the Minister avoided engaging the press. We wonder if they will start staking out the hotel’s back entrance now.
While there is no specific proposal regarding production policy on the meeting agenda, OPEC will use the occasion to admit Gabon with 250,000 b/d production as a new member. In addition, the issue probably getting the most attention from members is a decision on a new OPEC Secretary-General. The group is considering three outside candidates of which we view Nigeria’s Mohammed Barkindo as an early favorite. However, a disagreement could result in a continuation of Secretary-General el-Badri’s “acting” term. Alternatively, a disagreement could also result in a rotating figure-head administrator by the OPEC President for annual terms. The current Presidency held by the Qatar Minister will end in December and would rotate to the next member in alphabetical order which would result in Saudi Arabia serving as the next OPEC President and potentially as a figure head Secretary-General. While this may provide incentive for consensus on one of the three candidates for Secretary-General, there is no question that Saudi Arabia will be assuming the OPEC Presidency at a time when a policy change may be under consideration for the first time in two years.