This meeting will pot ERY or ERX
June 22 summit may prompt changes to 18-month-old output-cut pact
The Organization of the Petroleum Exporting Countries will its 174th meeting on June 22 in Vienna.
The Organization of the Petroleum Exporting Countries can claim success in its roughly 18-month-old effort to curb production—easing a global glut of supply and raising oil prices.
What the oil producers decide to do next at their meeting on June 22 in Vienna, however, could largely erase that progress.
“OPEC countries will be contemplating production levels that could potentially tip the supply/demand balance currently in place, leaving crude oil pricing susceptible to oversupply,” said Ben Cook, portfolio manager at energy investment management firm BP Capital Fund Advisors.
“Great work has been achieved in coordinating OPEC and non-OPEC countries together to minimize global inventory levels,” he said. “Preserving that cooperation will be extremely tricky, given the higher oil price [and] revenue-generating environment that we find ourselves in today.”
OPEC, along with 10 big nonmember oil producers led by Russia, agreed in late 2016 to hold back crude production by about 1.8 million barrels a day beginning in 2017. The pact is set to expire at the end of this year. The compliance rate among OPEC members was 158% in May (meaning they cut 158% of the agreed-upon daily reductions), said the International Energy Agency.
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The agreement has been “successful in an unprecedented manner,” said Omar Al-Ubaydli, economist at think tank Derasat in Bahrain. “OPEC has never achieved such high levels of coordinated restraint.”
Still, even as crude production quotas “have served their purpose eliminating the inventory glut plaguing the market, real risks to global supply have materialized since the quotas were implemented,” said Cook.
OPEC-member Venezuela’s output has taken a hit on the back of an economic crisis, with the nation losing more than 1 million barrels a day of production in just over two years “due to mismanagement, chronic underinvestment, and corruption,” said the IEA.
U.S. plans to impose sanctions on oil exports from OPEC member Iran have also contributed to concerns over further involuntary declines in global production and supplies.
Those worries have prompted talk of possible increases in production. Saudi Arabia already raised output in May by 100,000 barrels a day, to just over 10 million barrels a day, though it still delivered more than 100% compliance with output cuts, according to the IEA.
“The Saudis and Russia want to raise production to keep oil from losing long-term market share to other energy sources,” said James Williams, energy economist at WTRG Economics. “The higher the price, the more substitution, increases in efficiency, and higher production growth in the U.S., all of which have a long-term impact on demand for OPEC oil.”
U.S. crude production is forecast to hit an annual record of 10.79 million barrels a day in 2018, according to the Energy Information Administration.
The June meeting will be “the most important gathering of OPEC ministers since the November 2014 meeting in which OPEC agreed to engage U.S. shale producers in a battle for market share,” said Cook.
Anas Alhajji, a Dallas-based energy-market expert, said public statements from oil producers so far point to the “continuation of the production-cut agreement, but with lower compliance.” Producers may also decide to “stick to the agreement as is, with [a] promise to increase production in case of shortages.”
In the event of an oil shortage, he added, the U.S. Strategic Petroleum Reserve will be “used first to mitigate the impact on prices” as “OPEC spare capacity will take time to arrive in the market.”
There’s also the possibility that OPEC may decide to eliminate output quotas entirely, said Cook. That could prompt Brent crude prices to drop $1 to $3 a barrel on the news, and gradually rise by $4 by year end. On Thursday, August Brent LCOQ8, -0.97% was trading just above $76 a barrel on ICE Futures Europe.
But under what Cook sees as the most likely scenario for the meeting, OPEC would decide to “modestly” relax production limits in order to acknowledge “the impact of falling production in Venezuela and sanction-related reduction in Iran.”
If that happens, Brent crude oil prices would likely stabilize at current levels, then rise $5 by year end, he says.
By relaxing quotas, OPEC would take care to “keep the market adequately supplied” but be “mindful of the significant progress in inventory reduction made over the last year and a half,” said Cook, “ultimately reserving the option to expand production should the market require it.”
