VIENNA/June 23 – On Friday OPEC said it had reached an agreement to increase production to address political concerns from consumers about higher prices but the lack of details instead sent oil prices up 3.5 percent.
But on Saturday after the OPEC and Non-OPEC ministerial meeting, the Saudi and Russian oil ministers offered stronger language and a 1 million barrel per day (b/d) target that should cause oil markets to open lower on Sunday.
Instead of Friday’s OPEC message to the market of “you do the math,” Saudi Arabia’s oil minister Khalid al-Falih said he wanted to “correct any misperception” and that “decisive action will be taken.”
Both ministers offered much more details about how the production increase will be implemented. While the official communiqué was silent on a number or formula, al-Falih said the Joint Ministerial Monitoring Committee (JMMC), the OPEC and Non-OPEC compliance committee, was tasked with “coordinating” the “gradual release of volumes to address incremental demand.” The JMMC met Saturday morning before the OPEC and Non-OPEC meeting to begin plans for the production increase that will take effect on July 1.
One senior advisor to the Saudi oil minister told us that except for the 32.5 million top line cap, other provisions of the 2016 production cut deal no longer apply. Instead, the JMMC, co-chaired by the Saudi and Russian energy ministers, will decide all other details. The advisor told us that we should view the new deal as a green traffic light that is always on to add production as needed.
Indeed, Al-Falih acknowledged at the press conference that the new plan “indirectly implies a reallocation of (country) caps” and “no strict adherence to caps.”
While the 1 million b/d target was emphasized today, there were also many caveats about the plan forward. Minister al-Falih said the increase would be “gradual,” but will “not overshoot or undershoot” the market, and it is a “dynamic situation.”
We think the actual number will be ultimately lower in the 500,000 to 600,000 b/d range. Over the last 24 hours several ministers have described their interpretation of the agreement as increasing production from anywhere from 400,000 to 800,000 b/d.
Iran, we are told, had dropped their opposition because a specific number was not used in the communiqué on Friday. Subsequently, Iran would look the other way when production increased beyond the nominal 150,000 b/d that is already allowed under 100% compliance with country caps but Iran believes there was an implied agreement that the increase would not be the 1 million b/d that Russia had been seeking.
To this point, the OPEC President and UAE Energy Minister Suhail Mazrouei said at the top of the press conference that the message to the market is: “can we do it [increase production] – yes” but “will we overdo it – no.”
The 1 million b/d target increase was calculated by the JMMC to address an additional 983,000 b/d cut due to over-compliance during the last three months.
Before the press conference on Saturday, a Saudi advisor, responding to the criticism on Friday about the lack of specifics in the OPEC communiqué, told us the market would soon see an big increase in Saudi exports and production as evidence of the agreed plan.
Indeed, Minister al-Falih said at the press conference that the “machinery of Saudi Aramco was already set in motion” as they had “anticipated this decision would be made and that July demand was robust.” The minister said there will be a “measurable increase in product in July that is already in motion” adding that “some of that crude has been added.” In an answer to a press question, al-Falih estimated that the Saudi increase would be “in the hundreds of thousands not tens of thousands” and “hitting markets in August.”
Some of this increase described may already be on the market. Our friends at TankerTrackers.com said Saudi exports for the first 20 days of June were up 302,651 b/d compared to official data in April (chart below).
The Saudi minister also said that if the JMMC decided to change the 100 percent compliance target up or down, “we can call for an emergency meeting in September.” In addition, Minister Novak said discussions were also now underway about how to formalize permanent cooperation between OPEC and the Non-OPEC producers and he expected that an agreement on this point will be decided by the end of the year.
