- Pioneer: Oil prices could rise to $100 unless OPEC intervenes
- Iran remains the focal point in OPEC+ negotiations
- Analysts expect OPEC to return to normal compliance levels
- Consuming countries discuss leveraging buying power
OPEC is congratulating itself for its broad cooperation to reduce supply and increase prices, touting its actions as bringing about market stability and necessary investment into the global oil industry.
At its 7th International Seminar, held on Wednesday and Thursday in Vienna at the opulent Hofburg palace, OPEC officials highlighted the success of their strategy over the past two years to reduce the supply overhang and push prices to a “reasonable” level. In a sign of how far the cartel has come, during the last seminar, held in 2015, oil prices were collapsing and it had no policy in place to manage the market.
Both Russia and Saudi Arabia want to increase production to soothe oil market uncertainties, keep a lid on prices, and communicate that OPEC is not purely interested in increasing prices as Trump has criticized the group’s actions via Twitter.
On the other side, Iran, Venezuela, Iraq, and others have said they do not support a production increase. They do not want to lose market share to other OPEC+ members; they are comfortable with current price levels; and they do not want to be seen as kowtowing to Trump. The Iranian Oil Minister, Bijan Namdar Zangeneh, said that “the oil price should not be political” and that oil production should not be the target of international sanctions.
Today’s seminar is also notable for who did not show. The energy ministers of Saudi Arabia and Russia did not attend Wednesday even though they were slated to speak. Their no-shows were likely the result of ongoing dialogue between various parties in the 24-member OPEC+ and internal divisions ahead of Friday’s pivotal meeting.
Given the group’s discord, it’s unclear if OPEC+ will sufficiently handle the current complex market situation, which is experiencing a number of fast-moving events, such as lost supply in Venezuela, Libya, and other producer nations. But with so much to lose from a breakdown in talks, it’s hard to see the week ending without any agreement. Reports suggest that Saudi Arabia and Russia have already made a decision on an output increase, while Iran began the week refusing to agree to any output increases, but has softened its position over the past 24 hours.
Market watchers believe that the framework of the agreement—which calls for a 1.8 Mbd production cut—will remain intact, but the group agrees to return to normal compliance levels.
Saudi Arabia has the largest available spare production capacity, allowing it to increase supply in a short period of time. Prince Abdulaziz bin Salman Al Saud, speaking in the place of Energy Minister Khalid Al-Falih’s, said the Kingdom wants to provide the market with an “adequate” increase to avoid a shortfall from occurring but also keep a glut from forming. Russia, meanwhile, has as much as 700,000 barrels per day (b/d) of incremental capacity. If it ramps up from its agreed cut of 300,000 b/d, Russia could technically add another 1 million barrels per day (Mbd) to the market over the medium- to long-term.
Many analysts we spoke with believe that energy ministers’ rigid comments are mostly posturing ahead of Friday’s meeting. Market watchers believe that the framework of the agreement—which calls for a 1.8 Mbd production cut—will remain intact, but the group agrees to return to normal compliance levels. OPEC+ is currently over-complying, by about as much as 700,000 b/d, in large part due to unplanned supply outages. In short, OPEC may agree to return to initially established compliance levels and define it as an effective increase.
“Institutionalizing this cooperation” provides “tremendous value” and parties are working to create a permanent structure by the end of 2018.
Meanwhile, discussions continue towards the creation of a long-term alliance. The UAE minister and current OPEC president, Suhail Mohamed Al Mazrouei, said that “institutionalizing this cooperation” provides “tremendous value” and parties are working to create a permanent structure by the end of 2018.
Whether or not OPEC increases volumes to the market, oil prices could continue to rise. Pioneer’s Executive Chairman of the Board, Scott Sheffield, told the Seminar that if OPEC does not boost output, the market could potentially return to $100 because of lost barrels in Venezuela, Iran, and Libya, along with the Permian in West Texas, which is experiencing logistical bottlenecks. In fact, Sheffield said the Permian will not grow from September 2018 through September 2019 as a result of midstream and labor constraints. However, he argued that U.S. oil production will hit 15 Mbd by the middle of next decade, up by about 45 percent from today’s levels.
Managing its image
Are oil consumers as comfortable with prices as OPEC asserts?
“Increased transparency and cooperation,” and achievement of “a fair oil price for producers and consumers” was the recurring accomplishment described by speakers on the main stage. “For this generation and generations to come it is also clear to us that we have witnessed over the past few years underlines just now important collaboration is and how important to maintain that this group of producers together,” said UAE’s Energy Minister, who is also the President of the OPEC Conference.
Are oil consumers as comfortable with prices as OPEC asserts? Reports are emerging that China and India are discussing formation of an oil buyer’s organization in response to OPEC’s machinations and a shared interest in negotiating better terms as major importing countries. This is the most recent of multiple attempts on the part of India to coordinate Asian buyers. As both a massive producer and consumer of oil, the United States would presumably be positioned somewhere between the two organizations—U.S. crude shipments to Asia have increased in recent years, but tensions between the United States and OPEC are also high.
Much of the conversation from OPEC at the Seminar focused on managing market perceptions, improving its image, and shoring up its credibility.
Much of the conversation from OPEC at the Seminar focused on managing market perceptions, improving its image, and shoring up its credibility. Speakers brought up the desire for creating ideal market conditions that are acceptable for both producers and consumers. In this messaging, officials continually note how they are concerned about global upstream investment, which declined for three years before rebounding in 2017.
Mohammed Darwazah of Medley Global Advisors told The Fuse that Russia wants to increase output to support its private oil companies and current prices are outside of Moscow’s comfort zone. “Russia wants prices to go down some, and the Saudis want higher prices,” he said, noting that the Saudis’ willingness to hike output is to support its relationship with the United States.
“Since Gulf producers want to respond to consumer concerns, you’ll hear a lot about investment from OPEC,” Darwazah told The Fuse, referring to the group’s justification for higher prices. “You’ll hear about how we had three years of declining capex and now the world is running behind in investment, and how more is needed to stop a shortage from occurring. That’s how they will keep on trying to sell this cut.”