Opec about to make ma­jor Oil de­ci­sion this week

Zambian Business Times - - FRONT PAGE - Source: CNBC Africa

• OPEC, Rus­sia and other pro­duc­ers are widely ex­pected to be­gin eas­ing their deal to limit out­put at a meet­ing in Vi­enna next week. • The gath­er­ing is shap­ing up to be a con­tentious event, with lines drawn be­tween coun­tries that can ben­e­fit from an out­put boost and those with lit­tle to gain. • De­spite the dis­cord, an­a­lysts think OPEC will reach a deal to mod­er­ately raise out­put over sev­eral months, with an op­tion to hike fur­ther.

A meet­ing of the world's big­gest oil pro­duc­ers is shap­ing up to be a con­tentious event, but an­a­lysts think the frac­tious group will reach con­sen­sus on their his­toric agree­ment to man­age the crude mar­ket.

OPEC and other ex­porters in­clud­ing Rus­sia ap­pear poised to ease vol­un­tary pro­duc­tion lim­its, which have helped shrink a global oil glut since they went into ef­fect in Jan­uary 2017. The deal isn't set to ex­pire un­til the end of the year, but ris­ing prices fu­elled largely by geopo­lit­i­cal risks have forced the pro­duc­ers to con­sider their exit strat­egy.

The agree­ment calls on OPEC and other pro­duc­ers to keep 1.8mil­lion bar­rels a day off the mar­ket, but they've ac­tu­ally been cut­ting deeper than that.

OPEC meet­ings are closely watched be­cause the pro­ducer group pumps about 40% of the world's oil, so its pol­icy de­ci­sions can have ma­jor im­pli­ca­tions across the en­ergy mix. Pres­i­dent Don­ald Trump, per­haps wary of the av­er­age U.S. gaso­line price hov­er­ing near $3 a gal­lon, has re­cently blamed OPEC for oil prices, which re­cently hit 3½-year highs.

Next week's meet­ing is also thornier than past gath­er­ings be­cause OPEC's cur­rent pro­duc­tion cuts are not lim­ited to the 14-na­tion car­tel. Rus­sia and sev­eral other pro­duc­ers have also been throt­tling back out­put, and top OPEC pro­ducer Saudi Ara­bia needs to keep the young al­liance to­gether, or its abil­ity to man­age the mar­ket would be di­min­ished.

The Saudis will have to con­sider their part­ner­ship with Rus­sia, their re­la­tion­ship with the United States, and sim­mer­ing ten­sions with Iran, OPEC's third-big­gest pro­ducer and Riyadh's chief re­gional ri­val.

"The de­ci­sions that are go­ing to be made in Vi­enna are go­ing to be more geopo­lit­i­cal this time than nor­mal," said Dan Yer­gin, vice chair­man of IHS Markit and a Pulitzer Prize-win­ning chron­i­cler of the pe­tro­leum in­dus­try. OPEC ten­sions rise

Head­ing into the meet­ing, a rift has opened among pro­duc­ers with com­pet­ing in­ter­ests, rais­ing fears of a re­peat of OPEC's June 2011 meet­ing, when mem­bers left Vi­enna with­out agree­ing on a shared out­put pol­icy.

Saudi Ara­bia and Rus­sia, in par­tic­u­lar, have spare ca­pac­ity and could cap­ture mar­ket share by pump­ing more. Both have ex­pressed sup­port for hik­ing out­put. How­ever, many pro­duc­ers are tapped out and would pre­fer to hold back sup­ply, which sup­ports prices. Those na­tions in­clude Venezuela, where out­put has cratered amid a pro­longed economic cri­sis, and Iran, which is fac­ing re­newed U.S. sanc­tions aimed at cut­ting off its oil ex­ports.

But they also in­clude Iraq, OPEC's sec­ond-big­gest pro­ducer. To­day, the coun­try's oil min­is­ter, Jab­bar al-Luaibi, said hik­ing out­put could "dam­age the in­ter­na­tional mar­kets" and warned uni­lat­eral ef­forts by some mem­bers to change the pol­icy might vi­o­late the deal.

Luaibi ap­peared to be re­spond­ing to re­ports that Wash­ing­ton asked Saudi Ara­bia to fill the gap left by a drop in Ira­nian ex­ports be­fore Trump aban­doned the Iran nu­clear deal and slapped wide-rang­ing sanc­tions on the coun­try.

Yer­gin said he be­lieves the Saudis would back a pol­icy that keeps in­ter­na­tional bench­mark Brent crude oil prices in the $75-$85 per bar­rel range, which would sup­port their ob­jec­tives, in­clud­ing main­tain­ing close ties with the Trump ad­min­is­tra­tion.

"They re­ally wanted to see the U.S. with­draw from the Ira­nian deal, and that means less Ira­nian oil ... so you have to put more oil into the mar­ket," he told CNBC on Wed­nes­day. Deal re­mains likely

The public bick­er­ing could con­tinue as mem­bers aim to ne­go­ti­ate the best pos­si­ble deal for their coun­try. But de­spite the dis­cord, an­a­lysts think the group will nev­er­the­less reach a deal to be­gin eas­ing the pro­duc­tion caps — and any in­crease will likely be rel­a­tively lim­ited and grad­ual.

Ed Morse, Cit­i­group's head of global com­modi­ties re­search, told CNBC that the Saudis, along with Kuwait and the United Arab Emi­rates, will likely push for a 500,000 bar­rel per day hike, leav­ing an­other half a mil­lion bar­rel in­crease un­til a fu­ture re­view of the mar­ket, per­haps in Septem­ber.

That aligns with the view at RBC Cap­i­tal Mar­kets, where the firm's global head of com­mod­ity strat­egy, He­lima Croft, also sees OPEC erring on the side of cau­tion with a 500,000 bpd bump. She thinks the car­tel will sig­nal a strong will­ing­ness to take fur­ther ac­tion, but she re­mains wary of ten­sions ahead of the meet­ing.

"None­the­less, we could en­vi­sion a sce­nario where the meet­ing proves to be so an­tag­o­nis­tic be­cause of deep di­vi­sions over pro­duc­tion and sanc­tions that they fail to reach a con­sen­sus, leav­ing big pro­duc­ers like Saudi Ara­bia and Rus­sia to act on their own," RBC said in a re­search note.

Michael Co­hen, head of en­ergy mar­kets re­search at Bar­clays, said that would push oil prices into the $80-$85 range, but he thinks the sce­nario is un­likely. He fore­casts OPEC will in­crease out­put by 700,000 to 800,000 bpd through the end of the year. If that hap­pens, Bar­clays would stick to its view that Brent will av­er­age $70 a bar­rel this year and $65 next year.

Francisco Blanch, Bank of Amer­ica Mer­rill Lynch's head of global com­modi­ties re­search, sees Rus­sia, Saudi Ara­bia, UAE and Kuwait grad­u­ally in­creas­ing out­put by about 200,000 bpd each quar­ter, even­tu­ally adding 1.2 mil­lion bpd by the end of next year. In his view, the pro­duc­ers will make the ad­just­ments based on oil mar­ket data to pre­vent a price spike.

"If the car­tel ag­gres­sively lifts out­put over the next six months, bal­ances will quickly shift into a sur­plus, push­ing prices lower," Mer­rill Lynch said in a re­search note. "Yet the un­cer­tainty around Iran and Venezuela also cre­ates a dif­fi­cult path ahead, as it opens the door to mul­ti­ple OPEC+ re­sponses."

Khalid Bin Ab­du­laziz Al-Falih, Saudi Ara­bia's en­ergy min­is­ter and pres­i­dent of OPEC, speaks as Alexan­der No­vak, Rus­sia's en­ergy min­is­ter, left, lis­tens dur­ing a news con­fer­ence fol­low­ing the 172nd Or­ga­ni­za­tion of Pe­tro­leum Ex­port­ing Coun­tries (OPEC) meet­ing in Vi­enna, Aus­tria, on Thurs­day, May 25, 2017.

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