The Fuse

Stage Set For Difficult OPEC Meeting

by Alex Adams | @alexjhadams | June 05, 2019

Since OPEC members disagree on output targets, market share and production volumes, recent meetings have been fractious affairs, both among members and their OPEC+ allies. The upcoming meeting promises to be no different. Concerns over losing market share to U.S. producers, falling Iranian production, and a deteriorating global economic outlook have set the stage for another turbulent summit in Vienna.

The first disagreement concerns when the meeting should even take place. Iran has opposed changing the meetings from June 25 and 26 to July 3 and 4—a move suggested by Russia and supported by Saudi Arabia. In a letter seen by Reuters, Iranian oil minister Bijan Zanganeh voiced his disagreement to reschedule the meeting, saying “no reason was provided on the urgency of giving consideration to this date change.” Algeria, Kazakhstan, and reportedly Venezuela and Libya are also against shifting the date.

Russian reluctance to engage in further output curbs represent another potential flashpoint. In opposing an extended deal, Rosneft CEO Igor Sechin has evoked the “market share” argument, voicing concern that the United States could raise production and take Russia’s market share. According to Interfax news agency, Sechin asked: “Does it make sense (for Russia) to reduce (oil output) if the U.S immediately takes (our) market share?… We have to defend our market share.”

Saudi Arabia used a similar argument during the oil price slump of 2014 to 2016, when they maintained high production levels to combat rising U.S. oil production and protect market share. This decision infuriated non-OPEC nations, such as neighboring Oman. In a 2015 meeting with OPEC producers, Oman’s oil minister Mohammed al-Rumhy called the high levels of production “irresponsible,” adding, “we are feeling the pain and we’re taking it like a God-driven crisis… I think we’ve created it ourselves.”

Sechin said Rosneft has consequently begun discussing possible compensation from the Kremlin should the Saudi-preferred supply cuts be extended. Sechin’s comments came after Russia’s oil output declined sharply due to an oil contamination crisis. Reuters reported that Kirill Tremasov, an analyst at Loco-invest, an investment company, said falling oil output threatens to tip the Russian economy into recession.

As Iran’s exports fall, Saudi Arabia has been quick to fill the gap, keeping OPEC supply steady, taking Iranian market share in the process. As Iran’s production has fallen by 230,000 barrels per day (b/d) to 2.32 million barrels per day (Mbd), Bloomberg reports that Saudi production increased by 170,000 b/d to 9.96 Mbd. Total OPEC supply was unchanged at 30.26 Mbd.

Iraq also raised production by 50,000 b/d last month to 4.63 Mbd, signaling a departure from the output cuts agreed upon by OPEC at the end of 2018. As Saudi Arabia urges OPEC+ to preserve the previously agreed upon targets, the threat of Baghdad abandoning its commitments could be another tension point at the upcoming meeting. For much of last year, Iraqi production was frequently out of compliance with the targets allowed under the cartel’s coordinated production cuts. As Iraq emerges from years of civil unrest, the country’s political leaders have few incentives to restrain production.

Russian discontent over Saudi intentions to reduce production and urge others to act similarly seems likely to be the largest potential flashpoint for the upcoming meeting—but internal OPEC politics, particularly between Saudi Arabia and Iran, mean this summit is rife with tension that threatens to upset proceedings.

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