VIENNA/JUNE 22 – The day started with Iran publicly opposed to the OPEC compliance committee recommendation to increase production having walked out of a meeting on Thursday night. The day ended with OPEC in agreement with something it had already agreed to: 100 percent compliance.
Since the St. Petersburg Economic Summit on May 31 and all this week, OPEC had advertised a 1 million b/d increase in production. Today, OPEC said it would increase production by reducing the level of cuts to 100 percent of compliance targets. The communiqué simply says that OPEC “decided that countries will strive to adhere to the overall conformity level of OPEC-12, down to 100%, as of 1 July 2018.”
While it is positive for consumers that OPEC announced adding production, the market did not get a specific number or a formula to calculate a number of added production. The mystery number and lack of specificity is bullish for oil prices and indeed prices were up over 2 percent on Friday.
In our view, the lack of specifics is a sign that OPEC was not able to get agreement on a specific number or formula. We think OPEC was genuinely pleased that they prevented an outcome that Iran opposed and only shows how bad the situation was earlier in the week.
Just before the meeting started and the press was kicked out of the room, one of our key and reliable sources who sits at the ministers table at OPEC told us that Iran was still a major problem. We believe Iran and others opposed going any further than 100 percent compliance.
OPEC President and UAE Energy Minister Suhail Mazrouei announced the decision at the press conference to reduce over-compliance to 100 percent telling reporters and analysts “you do the math.” But he acknowledged that OPEC had “avoided having allocations” of new production because of differences of opinion among producers.
Under the current agreement, reducing the current over-compliance of 152 percent in May to 100 percent in July means only an additional 150,000 barrel per day (b/d) in production. So coming up with a new allocation or other formula is necessary for OPEC to get close to a meaningful increase in production or the advertised number of 1 million b/d.
We suspect OPEC knows it needs to provide more information to the market and Mazrouei added “we are dealing with it.” It’s possible that we may get more information on Saturday during the OPEC & Non-OPEC meeting but we think more likely in a few weeks or even months.
The OPEC and Non-OPEC meeting begins on Saturday morning here in Vienna and we are expecting comments from Saudi Minister al-Falih and Russian Minister Novak at the press conference following the meeting.
In our view al-Falih and Novak will confirm non-OPEC’s participation in the move to 100 percent compliance and also announce some on-going cooperation between OPEC and non-OPEC producers.
