Thursday, June 14, 2018 Energy Intelligence Premium Weekly...

Thursday, June 14, 2018
Energy Intelligence Premium Weekly

Opec’s Battle for Consensus

Energy Intelligence believes Saudi Arabia and Russia will aim for a defined increase in supply at the Jun. 22-23 Opec/non-Opec meeting, but will settle for a vaguer call for action if they meet serious resistance. Our analysis shows an unusual lack of clarity over oil market fundamentals, given uncertainty over US sanctions on Iran and turmoil in Venezuela. Geopolitical tensions are exceptionally high, hampering con- sensus. Here are five key considerations, based on our conversations with Opec and Russian officials:

- SaudiArabia and Russia want a production increase, but also group unity.Riyadh is avoiding a fixed position on volume and timing, but has talked of a modest 300,000 b/d increment. Moscow said this week a revised production cut of 1.5 million b/d should be considered, implying a similar volume. We view Opec’s ability to reach a consensus, rather than the specific size of an adjustment, as the main challenge for this meeting. Given capacity constraints, any increase would essentially involve a phased return from Saudi Ara- bia, Russia, Kuwait and the UAE. Above all, Russia and Saudi Arabia agree on the need to maintain Opec/ non-Opec cohesion and promote a stable oil market. Both have unilaterally started to add more supply.

- Three options are being considered, but only one is straight forward.They are1)renegotiate individual allocations to less than the current 1.8 million b/d cut; (2) adjust group compliance toward 100% from levels of 143% (Opec/non-Opec); and (3) keep the deal unchanged, with a promise to add supply as needed. We view Option 3 as the fallback. Option 1, Russia’s position, would open a Pandora’s box
of claims and grievances. Option 2 would release around 700,000 b/d, but would expose Saudi Arabia and others to allegations of stealing market share, and could be opposed by some. Option 3 would be straightforward, and could be combined with a revision of Opec’s OECD inventory target and/or the promise of an emergency meeting in September. But it also holds the most market risk.

- Oil market fundamentals do not demand an immediate jump in supply. Our current Oil Market Intelligence numbers support the Saudi position that markets need ongoing, steady increases, rather than a large supply injection now. But we also see a need for flexibility, given the unpredictability of Venezuela’s decline and the pace and scale of Iran sanctions. Assuming Opec maintains production at current levels of 31.7 million b/d, we see supply deficits of 400,000 b/d in the third quarter and 600,000 b/d in the fourth. This assumes that (a) Venezuela loses a further 200,000 b/d by year’s end; (b) the main impact on Iranian output occurs at the turn of the year; and (c) Opec/Russia produce an average 300,000 b/d more in the second half.

- But oil markets are nervous and want action now. Geopolitical tensions have stoked market concerns about a future supply shortage, especially if fundamentals tighten more quickly. This sentiment will intensify as attention shifts to spare capacity. Amid stagnant investment and field declines, Opec’s effective spare capacity has contracted by 1 million b/d since 2013, to 3.25 million b/d, according to our estimates — or 3.55 million b/d with Russia. Only about 1.3 million b/d of that meets the International Energy Agency’s technical definition of output available within one month. A scenario combining a political crisis in Venezuela, an early collapse in Iranian exports and another major outage could push spare capacity to precarious levels.

- The geopolitical dynamics are exceptionally complex, making consensus harder to reach.The Trump administration is unlikely to be satisfied with a vague Opec promise of future action. Saudi and US interests are strongly aligned on Iran, and Saudi oil policy has become more politicized. We understand that US officials privately briefed the Saudis on the potentially severe impact of Iranian sanctions, and explicitly asked if they would raise production. But if Riyadh supports Washington too obviously, this will weaken its hand at Opec. In a complex balancing act, Riyadh also wants to protect its strategic alliance with Russia, an ally of Iran and rival of the US. Tehran has strong potential to make trouble. It will be loath to see its oil exports distributed among rival producers, and its veto power presents it with a rare weapon against US sanctions.

Contributors
Alex Schindelar
Executive Editor
+44 (0)20 7518 2222 [email protected]
Amena Bakr
Senior Middle East Correspondent
+971 4 364 2607 [email protected]
TJ Conway
Manager, Research & Advisory
+1 202 662 0702 [email protected]

http://storage.pardot.com/19202/197157/EIPW_061418_Opec_Battle.pdf


Outstanding piece of journalism and analysis from people who are on the ground and talk to all the chief protagonists. Best I’ve read.