The Fuse

The Numbers Don’t Add Up: OPEC Sows More Confusion With Production Increase

by Leslie Hayward and Matt Piotrowski | June 22, 2018

OPEC members, after a testy week of negotiations, agreed on Friday to increase production in order to rein in overcompliance and seek a return to 100 percent conformity (versus 147 percent in May) for the second half of 2018. In the end, the cartel agreed to what was originally expected—higher production to return to the original 1.2 million barrels per day (Mbd) cut established in late 2016, with 10 non-OPEC countries reducing another 600,000 barrels per day (b/d).

OPEC+ will gradually phase in the output increases during the second half of the year, with a target of a 1 Mbd hike.

OPEC+ will gradually phase in the output increases during the second half of the year, with a target of a 1 Mbd hike. However, the actual number of volumes coming to market will be 600,000 barrels per day (b/d). Only four countries—Saudi Arabia, Russia, the UAE, and Kuwait—have the ability to increase output. OPEC, in its press conference at the meeting, did not give figures on how the production increase will be allocated. “It’s pretty clever to avoid having to allocate production increases by country. I’m impressed. Just say you are going to add oil to get back to the original baseline,” one investor told The Fuse after the meeting. Michael Cohen of Barclays estimates that Saudi Arabia could raise output by 300,000 b/d, Russia by 100,000 b/d, and the UAE and Kuwait by 200,000 b/d.

OPEC will claim victory, particularly the Saudis, since they were pushing for a supply increase. But the cartel has not sufficiently addressed the market’s needs for the second half of the year. Crude futures markets rose by 2 percent on news of the deal, despite its presumed intention to take some pressure off prices. Forecasters, including OPEC, say that the market will see a deficit during the second half of the year, even with the increase in production. The deterioration of production in Venezuela looms large over the group, as do outages in Libya and possible lower exports from Iran later this year. Jamie Webster told us that the agreement is “bullish” and it “suggests some trouble with getting what they wanted as a group. This is more a fallback position than a desired decision.” He added: “OPEC+ still has significant challenges but at this moment the elements remain in place for the agreement to hold.”

OPEC will claim victory, particularly the Saudis, since they were pushing for a supply increase.

While Saudi Arabia got the deal it wanted, the Iranian Oil Minister can also claim that through his negotiating, he worked to keep the original deal to cut production in place. “Iran needed a face-saving mechanism to participate in today’s deal following their stance earlier this week,” Helima Croft of RBC Capital Markets told The Fuse. “We are seeing that in the communique in the form of maintaining the agreement and changing compliance to 100 percent rather than the current overcompliance.”

OPEC will meet again in December to review policy, but the Joint Market Monitoring Committee (JMMC) will meet in September in Algiers to analyze compliance levels. Some market watchers have speculated that if oil prices rise beyond expectations or inventories fall to disconcerting levels, ministers may also call an emergency meeting to further increase output. At that point, however, spare capacity may be limited to solely Saudi Arabia.

“We never target a price, our only target is market stability. As an organization we are becoming more inclusive.”

“We never target a price, our only target is market stability. As an organization we are becoming more inclusive,” said Mohamed Al Mazrouei, UAE Energy Minister and Conference President. “We care about the consuming countries and we listen when they say they have a concern.”

Pressure from President Donald Trump and U.S. lawmakers also impacted negotiations within OPEC+, with Iran outspoken about recent actions and rhetoric in Washington. OPEC members are paying attention to the NOPEC legislation in the House of Representatives, which would allow U.S. companies and citizens to sue OPEC countries. “We are following with keen interest legislative developments in Congress relating to NOPEC legislation and we are in close contact with our counsels and advisors,” Secretary-General Mohammad Barkindo said at the press conference. “It’s premature to go beyond that at the moment.”

U.S. pressure was believed to shape the strategy of Saudi Arabia and Russia. “Of all the negotiators, Russia has been the most helpful to the U.S. in this process—by proposing a 1.5 million barrel per day increase, and potentially encouraging Iran to stay in the agreement,” said Croft.

Another big issue going forward is whether OPEC+ will institutionalize its cooperation.

Another big issue going forward is whether OPEC+ will institutionalize its cooperation, which it wants to achieve by the end of the year. “In terms of when it will be approved, we target before end of year,” said Barkindo. “I think we can do that. There is an understanding between the two largest producers that in principle they are keen on keeping this group together and speaking to every member of OPEC and non-OPEC, I can assure you that everyone is excited and happy and everyone have seen the benefits of such gathering.”

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