Since our Tuesday client note in which we said OPEC was likely to take a pro-production view at its Sunday meeting in Algeria, several new developments have only increased our confidence that more production is on its way.
OPEC’s Joint Ministerial Monitoring Committee (JMMC), co-chaired by the Saudi and Russian energy ministers, meets on Sunday - the first such in-person meeting since OPEC announced its plan to boost production by one million b/d in response to pressure by President Trump after the Brent oil price passed $80 in May.
We said in our Tuesday note to expect a decision either in the form of a specific production boost by some members who have capability or by some strong verbal intervention. We now believe a specific increase of about 500,000 barrels per day (b/d) is in the works with OPEC again focusing on reducing over-compliance to 100 percent.
OPEC agreed in June to reduce over-compliance with the production cut agreement to 100 percent and boost production accordingly. While generally the full OPEC conference must agree to decisions on production, OPEC in June authorized the JMMC to make decisions about getting to 100 percent compliance and distributing the increase in production.
At the post-OPEC meeting press conference on June 23, Saudi Minister Kahlid al-Falih explained the group's calculation: Using May production data, the JMMC said over-compliance was 152 percent and bringing compliance down to 100 percent translated into about a one million b/d increase. Reports today from Algeria indicate that OPEC sees over-compliance in August at 129 percent. Therefore, if the JMMC stays with the focus on reducing over compliance to 100 percent, we estimate it would translate into a production boost of about 500,000 b/d.
This potential 500,000 b/d increase might not all be categorized as "new" production - above the one million agreed to in June. Depending on your data source, OPEC has increased production from May to August from about 800,000 to one million b/d. So some of this 500,000 b/d boost might be carried over from June's announcement of a one million b/d increase. However, we think for public relations purposes, it will be sold as a 500,000 b/d increase.
* Click on the image to see a quick one minute video update from Joe McMonigle.
We see a repeat of the June OPEC meeting with another production increase coming in the near term. Here are five reasons why:
- Trump Pressure on “OPEC Monopoly” – President Trump tweeted on Thursday that “The OPEC Monopoly Must Get Prices Down Now!” after oil prices flirted with $80 on Wednesday. In our view, the tweet raises the odds even higher of Saudi & Co. hiking production. Trump’s red line for oil prices is $80 ahead of the US election, and the administration thinks it has an agreement with Gulf producers who support the Iran policy to keep prices in check until then. Trump has big leverage over the Saudis with concern that he might provide waivers to Iran or on continued US support for Saudi military action in Yemen. The production increase decision has likely already been made by the King and Crown Prince.
- Iran Boycott of OPEC Meeting – Iran, who is not on the JMMC, said in August that its oil minister would attend after reports of more lost oil customers this summer ahead of US sanctions. After Monday’s marathon conference call of OPEC’s Joint Technical Commission which prepares data for the JMMC meeting, Iran announced that the minister will not attend but its OPEC governor would go in his place. Then on Thursday, Iran said it will boycott the meeting and no one will attend from its side. All of this can only mean one thing: the talks about OPEC’s upcoming decision at the JMMC meeting is not going Iran’s way. Iran wants OPEC to preserve its market share and not increase production. It would also like to see prices rise to show the US the consequences of sanctions. Iran’s boycott of the Sunday meeting tells us that OPEC is only talking about adding production.
- NOPEC Legislation in Congress – Trump is likely the first US President to call OPEC a “monopoly,” a term similar to those used in the so-called NOPEC legislation that was introduced in Congress after gasoline prices rose in the early summer. The bill would apply US anti-trust laws to OPEC. Just before the late June OPEC meeting, the House Judiciary Committee voted to report the NOPEC legislation out of committee to the full House – a move that clearly rattled Saudi Arabia and all of OPEC. Momentum on the legislation has stalled since prices declined but can easily accelerate with $80 oil in the fall of an election. Previous Presidents Bush and Obama threatened vetoes of similar past legislation but Trump is viewed as a wild card by OPEC who could sign a bill into law. We are not sure Trump intended to use the word “monopoly” to infer action on NOPEC legislation but this is how it will be interpreted in Algiers, Vienna and Riyadh. If Trump next tweets “NOPEC” - watch out.
- Texas A&M Alumni Meeting of Two - Saudi Minister al-Falih met twice last week with US Energy Secretary Rick Perry both in Texas and Washington. Both are Texas A&M alumni and even attended the home football game together on September 8. Two days later Perry commended Saudi Arabia and Russia for protecting world citizens from oil price spikes during a press conference with Russian energy minister Alexander Novak in Moscow. “The kingdom (of Saudi Arabia), the members of OPEC that are opting their production to be able to make sure that the citizenry of the world does not see a spike in oil price are to be admired and appreciated, and Russia is one of them,” Perry said. It’s hard to believe Perry would make that statement if he was told by al-Falih “we can’t help you.”
- Decreases in Venezuela and Iran – US sanctions on Iran oil sales don’t go into effect until November 4 but already Iran’s oil exports have been cut by about 700,000 b/d, according to media reports. Other press reports have revealed that Iran is now building floating inventories of about 10 - 15 million barrels that further confirms a hit to crude exports. We forecasted last year that global oil markets will lose about one million b/d due to US sanctions on Iran oil. Our number was out-of-consensus as too high at the time but now it is looking like it was too conservative. In addition, Venezuela continues a steady decline in production by about 50,000 b/d per month and could be below one million b/d in total production by year-end. Significant declines from both producers are a key reason for oil approaching the $80 level again. We expect that OPEC will cite this as the main reason for a production increase and not having anything to do with Trump or the US election.
Summary: We see this next production hike as only as a near term policy to get through the US election in November but we think it will be difficult when faced with the double hits of continued declines in Venezuela production and extremely effective US sanctions on Iran oil exports. However, for the longer term, we believe Saudi Arabia and OPEC are comfortable with prices in the $80 range and may recalibrate the strategy to allow prices to go higher. We see the US election on November 6 and the next OPEC meeting on December 3 as catalysts for these near term and longer term oil price strategies.
