Not only a possible deadly confrontation is brewing between the Russia-Saudi block, supported by the UAE, and the Iran block, but also some answers need to be found for the ongoing Twitter War by US president Donald Trump. The latter has blamed via tweets OPEC of artificially pushing oil prices up, threatening economic growth and the wallets of Trump voters.
Washington has surprisingly found some support in Asia, as China and India have officially been complaining about the perceived high crude oil prices. Saudi Arabia, as the leading proponent of the Russian backed production volume cut agreement, needs to find a solution to this difficult situation. Finding a balance between the demands made by the US and Asian consumers, and the possible supply threats of Iranian sanctions, Venezuela’s production implosion or Libya’s ongoing war, will not be easy.
Moscow even has upped the ante by letting its oil companies vent the possibility of increasing production anyway. Saudi energy minister Khalid Al Falih, known to be an grandmaster of the oil game, currently is running on his last fumes, as his grand scheme looks to be threatened to unravel, as Iran keeps to its hardline no-production increase standpoint. Iran’s minister of oil Zanganeh and OPEC governor Ardebili already have openly stated to block any move to increase production substantially. The latter has received the support of others too, mainly Iraq, Venezuela and Ecuador. A stalemate is there, an open confrontation is not impossible. Some hope still is there, as Iran has indicated some cosmetic changes could be considered still.
Still, there are some questions to be asked. First of all, why would Russia and Saudi Arabia even consider a production increase. Current market fundamentals show that oil stocks are lowered, but not at all at a critical level. When looking at floating storage in Europe, there is almost no room left to fill even. At the same time, the effects of open the taps in Saudi Arabia, Russia and other OPEC countries could have unwanted side-effects. A perceived oil glut in the market, which could be if all would end up going again for market share, would push oil prices far below $60 per barrel, which is a critical level to support sustainable production levels in future. For Moscow and Riyadh, low oil prices are the last thing they can use, looking at their ongoing economic growth potential and immense investment projects being planned. Riyadh will also not be happy with lower oil prices as it is still on the road to put the Kingdom’s oil company Aramco IPO in the market. Crude prices of around $80 would for sure support the latter’s success.
Increased pressure by consumers however could lead to a small, cosmetic volume increase. Trump’s twitter war on OPEC also could be a reason to smooth things up and push some additional volumes in the market. By increasing volumes by around 300,000-600,000 bpd, all parties could easily fill up these gaps, while in reality not opening up their taps. If the lower levels are being targeted, Saudi Arabia, UAE and Russia even wouldn’t have to do anything, as these increases have already been partly put in the market last month.
OPEC could only indicate an increase, while in reality legalizing the lower compliance rates already in the market. Still, opposition even to this move exists in the OPEC ranks. Iran has vehemently opposed any production increase at present. In a statement to journalists, Iranian officials repeated that they would veto any such move. Tehran’s clear fear is that its Arab rivals, or even outright enemies, are taking advantage of the fact that Iranian oil volumes will be taken out of the market due to the implementation or threats of renewed and very heavy US sanctions. Already, the majority of traders or operators dealing with Iran have pulled back their operations in or with Iran. A total implementation of US sanctions will lead to a harsh decline in oil and petroleum product exports by Iran, the latter holes will be filled up by Arab producers for sure. By pushing for a stalemate within OPEC, Tehran and its supports, wants only to prevent Saudi Arabia to take advantage. Zanganeh also has openly attacked Washington of politicizing OPEC oil strategies. He attacked the US sanctions on a leading OPEC member, while also warning for renewed crisis.
OPEC’s former strength is currently undermined, but not broken. Infighting will be a risk factor that should be calculated into any forecast for the foreseeable time. OPEC and Russia also could be risking to forget that new geopolitical risks are emerging on the horizon, possibly threatening to put a dent in forecasted demand the coming years. The growing trade war between Washington and China, or Washington and Europe, could lead to lower economic growth or even stagnating oil demand. Price pressure will emerge, necessitating even a more cautious approach by Riyad, Moscow and Abu Dhabi, when considering lower compliance already. It would be maybe a more prudent move to ‘legalize’ the existing lower compliance within OPEC and Russia, without openly proposing production and export increases. Overall, the Vienna meeting could become a political confrontation of extremes, without breaking up the ROPEC agreement. Pushing real decisions to November 2018 could be a much more applicable move, also to give more room to get some of the cold out of the air. The oil market really doesn’t need blood on the walls of Vienna’s Hofburg, Austrian sweets are more to targeted.