OPEC meets on May 25 in Vienna. Leading up to the meeting we held a conference call on May 12 with Chakib Khelil, the former OPEC President and former Algerian Energy Minister. The following note includes some key findings and excerpts from the call but HERE is the replay to hear the entire call at your convenience.
Call Timeline
1:40 – Opening remarks from Chakib Khelil
5:30 – What is the likely outcome of the OPEC meeting?
8:00 – Any surprises at the meeting, such as a 9-month extension or deeper cuts?
10:40 – Will Libya and Nigeria still be exempt from any cuts in the deal extension?
13:15 – Can Libya sustain current production levels of 800,000 b/d?
14:56 – Is the Aramco IPO now the major factor in Saudi oil policy?
18:44 – What are the prospects for production increases in Iran and Iraq?
22:20 – Did OPEC misjudge how fast US shale would return?
24:50 – What is OPEC’s role in oil markets today?
28:35 – Are you optimistic about demand growth?
31:45 – Is there any chance OPEC increases production to battle US shale?
34:34 – What is the probability of at least a 6-month extension?
35:42 – What is the probability of a 9-month extension?
36:50 – Is there any chance of deeper OPEC cuts?
One of the major takeaways from our OPEC Preview conference call with Chakib Khelil, was his view that the Aramco IPO is a major factor in Saudi activism now on OPEC production and sentiment.
“There’s no doubt Saudi policy seeks stability in the market again,” Khelil said. “I believe (Saudi) Minister Falih has in mind some price target, probably $60, because that stability and price would be greatly helpful in their IPO.”
Of course, the big problem is that this policy gives clear guidance to US producers to turn on the spigots. Khelil also agreed that OPEC misjudged how quickly and by how much US shale would return with higher price signals.
“I agree it [US shale surge] was a surprise, and it poses a big dilemma for OPEC,” Khelil said. “This is the first time we see two actors in the oil market. Each one taking the lead when the conditions and market changes. When prices go down we have OPEC in the driver’s seat. When prices go up, we have oil shale in the driver’s seat. That is why we are in this uncertain oil market now - not knowing who is going to be in the driver’s seat in the next few months.”
OTHER EXCERPTS:
ON DEEPER CUTS
“OPEC is not ready for deeper production cuts because of Iran and Iraq face difficult situations in their countries. The burden might fall on Saudi Arabia mainly but I don’t think Saudi Arabia will go ahead with such a decision without having Russia participating and being involved. I’m not sure Russia responds quickly enough to proposals of that type. For example, this year it took Russia a much longer time to respond and come up with its commitment to the reduction. So I see that as a difficult decision and because the load is going to be on Saudi Arabia, I don’t think that is going to happen.”
ON LIBYA
“Libya is really in a difficult situation. The political situation is still in flux and it’s not clear they can come up with an agreement. My own feeling is that it is going to continue this year and possibly into 2018. On production, we will continue to see ups and downs with some groups trying to control the oil while other groups counteract. I doubt Libya can increase more now. There are diverse groups acting in Libya that can impact oil shipments and even production fields. As long as we are going to have the political situation unsettled, we should expect to see the same ups and downs in future production.”
ON SAUDI PRINCE MBS
“You don’t really hear Prince Mohammed now talking about the oil market situation any more. Minister Falih is probably now in the driver’s seat and has the consensus behind him.”
ON IRAN
“Iran has the potential but not really the means to increase production. They don’t have the financial means. They don’t have the contracts that will allow Iran to go beyond what they are producing now. Maybe they will go up another 100,000 b/d but I don’t think in the next 2-3 years they will be able to achieve more than what they have today.”
ON IRAQ
“Iraq, probably for different reasons, has the same issues because they need all of their resources to fight ISIS. And they haven’t been able to substantially increase their production, outside of Kurdistan and even they are experiencing some challenges. So Iraq is not going to be asked to limit its production because OPEC knows Iraq may increase but they can’t make fundamental changes in the supply/demand balance in the medium term.”
OPEC SURPRISED BY US SHALE’S RETURN
“Yes, I think most people were surprised actually. OPEC and those people who look at the industry were expecting that shale would have some problems with financing or even with the service companies. But between OPEC, IEA and EIA there is a difference of opinion too and this surprises me more. OPEC is saying that we are going to have a non-OPEC production increase of 1.2 M b/d. While IEA says it’s only 500,000 b/d and EIA says its 900,000 b/d. So if we take the average, it’s going to be an increase of about 1 M b/d so that is a slight increase from the previous predictions.”
OPEC ROLE IN OIL MARKETS TODAY
“Saudi Arabia has a target price in mind of probably $60 and they want the market to be stable. So they are really the decision makers in OPEC and up to now, they have been able to convince Russia to follow up on their lead. So the market is similar to the early 2000s when we had a range of prices. OPEC doesn’t have much choice but to follow up on that same model probably with the objective of $60 or maybe the range of $55-65 target. The big unknowns for OPEC are how much of the oil shale reserves are there and how much shale production will come in the next few years. These are the unknowns, and as long as you don’t have a good grasp on that, you can’t have a good strategy from OPEC’s side. So it’s going to be on a trial and error basis.”
