This Friday, OPEC will meet in Vienna for their bi-annual meeting. This time the meeting may be drawing even more attention than usual as the stakes are extremely high. And although political differences between members are typically put aside when deciding on oil policy, that will be a bigger challenge this time. Non-OPEC member Russia – but participant in the OPEC/non-OPEC 1.8 mb/d production cut agreement, in place since November 2016 – is calling for a significant 1.5 mb/d rise of production. Saudi Arabia – OPEC’s biggest oil producer – seems to agree that production should be increased to meet the ongoing rise in global demand, and to prevent an imbalance in the market. OPEC members Iran, Iraq and Venezuela on the other hand oppose any rise in production at all, and want to stick to the current production cut agreement in place (-/- 1.8 mb/d until the end of 2018). Iran is especially unwilling to allow others to increase production, especially since the country is already facing a drop in exports over the coming months as a result of the newly-imposed US sanctions following its withdrawal from the Iran nuclear deal. Indeed, there is actually a risk of underproduction due to a combination of unexpected production losses in Venezuela and, to a lesser extent, Libya. On top of that, the lack of investment in the sector is also starting to bite, and is not being fully offset by the increase in US shale oil production.
The question is how OPEC will come to an agreement this Friday that all countries can support, without losing some credibility back at home. One likely scenario is that the OPEC/non-OPEC production cut agreement of 1.8 mb/d will remain intact until the end of the year (or at least to the next meeting in November). There is room for production increases if some oil-producing countries can make up for the unexpected losses of for instance Venezuela. That would provide room for more OPEC/non-OPEC production up to 600 kb/d. It will be extremely important for OPEC to guide the market through their decision, however. This should prevent a significant drop in oil prices from a long-squeeze (selling in some of the still-excessive long positions in oil futures), which would hurt all oil producers.
The outcome of this meeting may lead to some near term downside pressure on Brent oil prices, especially if a modest rise in production is announced. Still, this would be fully consistent with our longer term forecast for an uptrend in oil prices. For more on our oil price outlook, please see our latest Energy Monitor – Oil prices: testing the highs. (Hans van Cleef)