VIENNA/June 21 – As OPEC ministers began arriving on Tuesday in Vienna for their International Seminar and the Friday mid-year OPEC meeting, the body language was not good. Iran’s oil minister told reporters that it would veto any attempt to increase production in defiance of calls from President Trump. Both the Saudi and Russian ministers delayed their arrivals in Vienna and cancelled their speaking slots at the OPEC seminar sending representatives to speak on their behalf. Most other ministers offered reporters nothing more than a “no comment” to questions about a potential hike in production.
But on Wednesday there appears to be signs for potential progress for agreement that would allow some added production in the range of 500,000 barrels per day (b/d) but likely not the 1 million b/d that Russia is seeking.
The group is planning to use a classic-political word game trick and will describe any action as “reducing the cuts” instead of “adding new production.” This has more to do with placating some OPEC members opposed to adding production in order to achieve consensus than it is about any market messaging.
Iran’s minister gave a fiery speech on Wednesday afternoon that blamed Trump for higher oil prices saying that US sanctions on Venezuela and Iran caused a spike for political reasons having nothing to do with production. Iran also told reporters that it would not oppose added production from members complying at 100 percent rather than current over-compliance at 150 percent saying it was already in the agreement for 100 percent. But Iran seem to continue to be opposed to changing the current deal and individual country caps that were agreed to as part of the 2016 deal that would allow a meaningful increase in production.
On thing is clear: Iran is loathe to give Trump any victory from OPEC here in Vienna.
The amount of oil that would be added with compliance at 100 percent instead of 150 percent is very small. We estimate that OPEC and its non-OPEC partners would only increase production by about 150,000 barrels per day (b/d) based on actual cuts in May vs. agreed cuts – far less than Russia’s preferred scenario for 1.5 million b/d or even their original request for 1 million b/d. See chart below published by Platts regarding actual May production (we assume no added production from Angola, Libya, Nigeria, Venezuela or Mexico.)
In order to add a higher number of meaningful new production, OPEC will need to change the country caps that would allow others to make up lost production from Venezuela and others. Iran seems opposed to changing the agreement to allow this but we are told that they have acquiesced to another alternative to accomplish the objective and will simply look the other way. We will have to await the communique to see how this might be effectuated.
As we said in Monday’s note, Russia’s new proposal for 1.5 million b/d for Q3 really amounts to a 750,000 b/d increase for the rest of 2018. So a compromise between Iran’s 150,000 and Russia’s 750,000 would likely be in the 450,000 to 500,000 range and be split among any producers who can add supply.
All of this is in line with our original forecast of an increase between 300,000 to 500,000 b/d which we believe is a level that will disappoint markets. Since Russia and Saudi Arabia are reported to already be producing about 100,000 b/d each in June, it will provide a convenient opportunity to announce a higher number of about 700,000 b/d but 200,000 b/d of this number is already on the market.
Another key word to watch for in the communiqué is whether the increase is described as “supply” (ie exports) or “production” since the latter may be used for domestic demand by the producer.
If there’s not consensus at the OPEC meeting on Friday, it will be a bad day for oil markets. But OPEC meets with its non-OPEC partners on Saturday, and as we said previously, we will expect Russia and Saudi Arabia to make press statements about further loosening compliance via a soft temporary unilateral increase of up to 500,000 b/d.
Russia is also pushing for another reconsideration of production at a special OPEC meeting in September around the Joint Ministerial Monitoring Committee (JMMC) meeting in Algeria. This tactic will keep the market guessing about a further increase in production and could impact prices. It is worth noting that the Saudi and Russian ministers co-chair the JMMC.
There is a lot of talk here about the recent US House Judiciary Committee passage of the so-called “NOPEC” legislation. This perennial legislation when prices rise has always gotten OPEC’s attention but has taken on added significance with President Trump. Previous Presidents have all signaled that they would veto the legislation if passed but Trump is more of a wild card. Based on his recent and historic criticism of OPEC, Trump in the White House makes the NOPEC bill’s chances of becoming law better than ever before. Saudi Arabia and increasingly other OPEC members see gas prices in the US as a potent political issue and hope that this move to add production (or reduce the cuts) will provide some breathing room to get past the US congressional elections in November. Our view on the NOPEC bill is that it still has many hurdles as the House and Senate leadership are unlikely to allow floor votes on it. Certainly, it is politically popular but we don’t think Republican political strategists see it as a sure-fire way to win elections and also worry about giving anti-energy Democrats a chance to cast a popular political vote on the NOPEC bill.
