Opec ‘haves’ to prevail at stormy meeting

Group with Russia, Saudi Arabia and other countries has the spare capacity to raise production if they wish

Opec and its friends can be divided up in many ways, but the most useful in the current environment is the “haves” and the “have nots.” The first group consists of Russia, Saudi Arabia and the other countries, who have the spare capacity to raise production if they wish. The rest fall into the other camp, with little, or no, ability to raise production.

Why does this matter? Because Saudi Arabia and Russia are trying to assemble support for lifting the group’s output. They will likely find some allies, but face opposition led by Iran and Venezuela.

This means Opec’s June 22 meeting is likely to be stormy.

Both Venezuela and Iran have written to the group urging unity against external sanctions, citing Article 2 of its statute. Their move is unlikely to sway Saudi Arabia, which is facing growing US pressure for a million-barrel-a-day increase in supply, or Russia, where the oil industry is urging restraint to be eased.

If anything gets agreed at all it may simply be to maintain the current deal on paper while committing to ensure adequate supply to the market — that would be vague enough to cover just about any eventuality without directly addressing any of them.

If anything gets agreed at all it may simply be to maintain the current deal on paper while committing to ensure adequate supply to the market.

Opec is already forecasting a big global oil deficit for the second half of 2018. This assumes that the group continues to produce as much oil as it did last month. But if supply from Venezuela and Iran falls that deficit will get even bigger.

Though Russia and the Arabian Peninsula should be able to make up the shortfall, doing so would undoubtedly stoke tensions in the Middle East and simultaneously reduce the spare capacity available to counter any further disruption to supply.

Venezuela’s output will fall further in the coming months. While President Nicolas Maduro declares the country could boost output if Opec relaxes output cuts, the truth is that output is well below the target level it agreed in 2016 and the state oil company may be considering a declaration of force majeure on some of its oil supply contracts this month, according to Argus.

The International Energy Agency said capacity could fall by several hundred thousand barrels a day by the end of the year.