The Fuse

With or Without You: OPEC+ to Increase Supply Even if Iran Fails to Compromise

by Leslie Hayward and Matt Piotrowski | June 22, 2018

Drama is high, even by OPEC standards. At the morning’s press scrum at OPEC headquarters in Vienna, ministers were confident that a deal would be struck to increase production by one million barrels per day (Mbd). Iran has been the disruption against what would otherwise be a clear agreement between Russia and Saudi Arabia. The country’s oil minister has struck a confrontational tone, opposing OPEC making decisions based on pressure from U.S. President Donald Trump, who recently re-imposed sanctions on Iran.

Iran has been the disruption against what would otherwise be a clear agreement between Russia and Saudi Arabia.

Tensions spiked last night when Iranian Oil Minister Bijan Zangeneh stormed out of the Joint Monitoring Committee Meeting and told journalists that it was not a good meeting and a deal was “unlikely.”

But market watchers are not sure Iran’s participation is necessary. The Saudis are determined to increase supply, with or without Iran’s agreement. Before the press roundtable this morning, the Saudis and Iran held pre-meeting bilateral talks to hammer out differences. Iran has wanted to keep the initial deal intact, but the Saudis and Russia want to push for an agreement to increase output to stabilize prices and prevent a supply shortfall from materializing in the second half of 2018.

So why work towards a deal with Iran if they aren’t necessary for Saudi Arabia and Russia to increase supply? The credibility of the revitalized organization and the legitimacy of its alliance with non-OPEC producers, and its promises to bring price stability to the market, are on the line. A breakdown in talks would threaten the pact agreed in late 2016 to cut output by 1.8 million barrels per day (Mbd)—a level that has seen over-compliance of 152 percent, according to last night’s monitoring committee meeting.

Even though Saudi Arabia’s headline figure calls for a 1 Mbd increase in crude supply to be phased in throughout the second half of the year, the actual physical barrels being added will amount to less.

Adding to the irrelevance of Iran’s demands is the fact that it is not currently capable of increasing production. Even though Saudi Arabia’s headline figure calls for a 1 Mbd increase in crude supply to be phased in throughout the second half of the year, the actual physical barrels being added will amount to less, approximately 600,000 b/d. The increase will mostly come from Saudi Arabia and Russia, with some extra volumes from UAE and Kuwait.

Despite an agreement to hike output—with or without Iran’s approval—the outlook in the medium term appears bullish for oil prices. An increase of 600,000 b/d would not be sufficient to close the 2H expected supply gap, which could reach as high as 1.8 Mbd. Currently, Libya is producing only 450,000 b/d after clashes at oil ports, Venezuela is declining about 40,000 b/d per month, and Iran’s exports are set to drop later in the year because of re-imposed sanctions. At the same time, higher Saudi Arabian production reduces spare capacity. Effective global spare capacity—which can be brought online quickly—is now at only 2 Mbd, according to EIA, similar to levels seen in 2008 when prices reached their all-time highs.

Keeping with the narrative that OPEC is working toward market stability, Mohamed Al Mazrouei, the UAE oil minister and president of the OPEC Conference, said that the organization is motivated by boosting prices to stimulate investment over the long term, as more than $10 trillion is needed to increase supply to meet global demand growth. However, analysts note members’ main reasons for cutting output is to increase short-term revenues and satisfy domestic concerns.

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