As we forecasted in our Hedgeye preview note last week, OPEC’s Joint Ministerial Monitoring Committee (JMMC) meeting on Sunday concluded without a recommendation for a production hike and instead reverted to similar March JMMC messaging about “achieving a balanced market and working towards oil market stability on a sustainable basis.”
Despite a few general comments by some ministers to the media gathered in Jeddah that the cuts should be extended after June, there were also no clear signals about decisions OPEC will take when it meets on June 25-26.
Instead, we think we are heading toward an acrimonious OPEC meeting thanks to Iran sanctions, concerns about market share and rising geopolitical risk for oil markets. As a reminder of the increased geopolitical risk in the heart of the Middle East oil producing region, the US Embassy compound in Iraq was attacked by a reported RPG bomb just after the JMMC meeting concluded. President Trump responded with a swift tweet warning Iran today.
For the Saudis, however, the path ahead is clear: continue with the Saudi destocking strategy to further lower global crude inventories with special emphasis on cutting exports to the US. This means extending the production cuts that expire in June through the end of 2019.
Saudi Energy Minister Khalid al-Falih suggested to reporters that his recommendation in June will be to bring down inventories “gently” but to remain on trajectory to normal levels while making sure customers needs are met. We think the word “gently” refers to a potential change in what the OPEC statement referred to as “voluntary production adjustments.”
Al Falih said Saudi Arabia will ensure consumer demand is met but will not flood the oil market. He was sure to add that he cannot promise that the Kingdom will continue with cuts of 500,000 barrels per day (b/d) more than their agreed allocation under the December agreement. We think this is a reference to an expected seasonal hike in production to meet summer power needs in the Kingdom of about 300,000 - 400,000 b/d.
Still, al-Falih indicated on Sunday that Saudi Arabia’s production will be about 9.8 million b/d in May and June in line with current reduced levels. This likely means you may see some messaging about increasing production for July/August at the June OPEC meeting that gives Saudi Arabia a two-for: we would increase production anyway for domestic power needs but also favorable news for President Trump.
The other piece of interesting news from Sunday’s JMMC meeting was Minister al Falih’s comments on Iran Exports: “I think there is a lot of oil that is leaving the shores of Iran or the borders of Iran that is not accounted as Iranian oil.”
In our view, this accomplishes two objectives. First, it hopefully mitigates any trouble and opposition from Iran at the June meeting to continue the cuts. Whether true or not, overcoming US sanctions to continue oil exports is a source of pride for the Iranian regime to claim credit, and al-Falih’s comment makes it tough for Iran to claim adverse conditions or lost market share. But second, it provides Saudi Arabia with more messaging that the US needs to do more to clamp down on Iran exports before the Saudis bring more supply to market.
Russia Energy Minister Alexander Novak continued to put off a commitment on extending the cuts until the June meeting. We know this is the usual playbook with Russia throwing cold water on the need to continue the cuts. But we think this time is different.
Russian oil companies continue to oppose the cuts but there is a new concern about losing market share to the US. While Putin likes the limelight on the global stage as a key player with OPEC, Russia is now increasingly concerned about surging US production now past Russia as the largest producer. They view the OPEC cuts and higher prices as incentivizing this growing US production. More to come from us in a future note.
Let’s review the three big takeaways from our preview note with Sunday’s actual meeting outcomes.
The next month leading up to the June OPEC meeting will be dominated by Iran. The US policy of maximum pressure on Iran means maximum pressure for oil markets, and the number of geopolitical events is only rising as we head into the high-demand summer season. As a result, we see Brent prices rising above $75 as we approach the June 25 meeting.