Headlines from Vienna will help determine oil price trends
CONCERNS around oil supply disruptions may have eased after Saudi Arabia and Russia raised the possibility of releasing more oil into the market. But it is headlines from the upcoming June 22 meeting between OPEC and non-OPEC suppliers that will truly determine the near- to medium-term price trend.
International oil prices, which hit 3 1/2-year highs in the aftermath of the US announcing sanctions against Iran, eased back after Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak said at the St. Petersburg International Economic Forum in late May that they could start reducing output cuts in the second half of 2018.
OPEC and 10 non-OPEC producers, led by Russia, were expected to maintain the 1.8 million barrels per day supply cut through to the end of 2018.
The front-month ICE Brent crude futures contract, which had breached the $80 per barrel mark on May 22, has since retreated to the $75 per barrel level.
But the 24-country OPEC and nonOPEC alliance has a tough task ahead.
Questions that will need to be thrashed out in Vienna later this month will center on how much oil should be released back into the market and at what pace.
Ministers will be cautious of the need to strike the right balance. Too significant a drop in price could thwart upstream investment, which has seen some signs of revival since the start of this year, and too high a price could impact the economies of the world’s largest oil consumers and bring demand destruction.
The volume and pace of output release is tough enough to estimate given the uncertainty around Iranian and Venezuelan supply disruptions, but tougher still will be negotiations with Iran.
Iran has already started playing hardball, having issued a warning to its OPEC counterparts not to take the market share it risks losing under US sanctions.
Iranian oil minister Bijan Zanganeh in a letter to OPEC President and UAE oil minister Suhail al-Mazrouei said he wanted a separate agenda at the Vienna meeting to specifically discuss support for his sanctions-hit country.
Many of the biggest Middle Eastern OPEC producers – including Saudi Arabia and Iraq – are direct competitors to Iran and so are likely to be the beneficiaries of any reduction in its output. Iran currently has 12% of OPEC’s market share based on S&P Global Platts survey data.
Iran is already facing the brunt of the sanctions. French major Total last month halted plans to develop Iran’s giant South Pars gas field as it sought to clarify whether the investment could avoid falling foul of US sanctions.
Separately, the country’s plans to attract international investment to upgrade its downstream sector was dealt a blow after South Korean contractor Daelim Industrial pulled out of a Eur1.83 billion deal to build new facilities at the Esfahan refinery.
Against this backdrop, Iran will go all out to protect its crude market share and has already stepped up diplomatic efforts to retain key customers.
Iran’s European customers, who lift around 700,000 b/d of Iranian crude, have slowed their buying mainly due to concerns about shipping and insurance.
The European Union has promised Tehran that it will explore all possibilities to ensure uninterrupted imports. These efforts may well take on new vigor after the US slapped tariffs on steel and aluminum imports from the EU.
But Asia is where a bulk of Iranian crude flows to, and signals from Asian customers have so far been mixed, making it hard to assess the extent of future supply disruption.
China and India, which together take a little under 1 million b/d of Iranian oil, have said that they will maintain imports.
South Korea has said that it is trying to pare back crude shipments from Iran. Over January-April, its imports of Iranian crude fell 34.6% on the year to 321,000 b/d. However, Iran still remains South Korea’s fourth-largest crude supplier.
South Korea is also not in a position to ignore US sanctions because the US is part of its key military alliance trying to resolve North Korean nuclear threat.
Japan, meanwhile, is waiting for more clarity from Washington on the sanctions before deciding on its next steps. Japan imported an average of 165,481 b/d in fiscal 2017-2018 running from April to March.
The OPEC and non-OPEC alliance will also have to heed supply disruption from Venezuela and tightening supply-demand fundamentals.
OECD oil stocks fell below the five-year average by 1 million barrels in March for the first time since 2014, according to the International Energy Agency.
Meanwhile, the Venezuelan supply crisis seems to have worsened with state-owned PDVSA telling its customers that it will only be able to supply 46% of the 1.495 million b/d it had committed to supply in June.
Chinese buyers of Venezuelan crude have already started exploring alternative supply options.
Mriganka Jaipuriyar is Associate Editorial Director, Asia & Middle East Energy News & Analysis at S&P Global Platts