The members of the Organization of the Petroleum Exporting Countries (OPEC) reached a consensus on Friday to increase their crude output in order to address concerns over rising oil prices, however the group didn’t give any clear information regarding the amount and allocations of the rise. Now, the question is how this decision is going to project in the oil market?
The challenging agreement
The agreement was achieved in a situation where most of the market analysts and energy experts believed that the Friday meeting would be one of the most challenging gatherings of recent years.
Prior to the meeting, the group were divided over the Saudi-led decision to ease the production cuts and rising the supply, some nations like Iran, Iraq and Venezuela were against the proposal while others like non-member Russia favored it.
Finally, the challenging agreement was achieved on Friday since Iran, as the head of opposition party, was convinced to approve the plan when Saudi Arabia’s Energy Minister Khalid al-Falih supposedly agreed to a framework that Iranian Oil Minister Bijan Namdar Zanganeh proposed during a private session ahead of the OPEC meeting.
Earlier in Thursday, Bloomberg had reported that Iran has “offered OPEC something that could begin to ease the fraught atmosphere in Vienna”.
Zanganeh told reporters that OPEC does not need to change its output deal since the group had already cut supply by much more than it had agreed. What Zanganeh offered was for OPEC and Russia to pump back up to decrease the current cuts to the initial 1.176 million barrels per day (bpd).
Output in May 2018 was actually down by 1.9 million, somehow 62 percent or 724,000 bpd more than what was agreed upon in 2016.
Although Iran’s proposal is in fact a practical solution for all the raised concerns, but what is important now is how this framework is going to be executed. In other words, how the organization is going to allocate the production increases across its members, since only some members like Saudi Arabia, the United Arab Emirates and Kuwait have both the spare capacity and the ability to increase output.
Considering the cuts that the kingdom has done within the past 1.5 years, Saudi Arabia currently enjoys a great spare capacity and the Kingdom claims to have the ability to increase production by about 2 million bpd.
According to OPEC’s latest monthly report the kingdom produced 9.987 million bpd in May while they claim of having a 12 million of daily production capacity.
Russia, which, in my opinion, could be considered the sole winner of this whole situation, could increase its production up to 500,000 bpd, as Bloomberg reported “Forecasts vary from 215,000 barrels a day from Renaissance Capital to some 500,000 barrels seen by state-run Gazprom Neft PJSC, the nation’s No. 3 producer.”
Russia has been voicing the decision for an output increase months before the Friday meeting. In late May, the country’s largest oil company, Rosneft, announced a capacity test for bringing back the production it cut under the deal between Moscow and OPEC.
As the Energy Expert and Political Science Professor, Albert Bininachvili would put it Russian oil policy has always been based upon taking advantage of opportunities that market and geopolitical issues present and this time is no exception.
“Now in the current situation, although they [Russia] don’t have as much spare capacity as the Saudi’s, but still the country has a great potential for oil exports,” Russia is willing to deploy all its capacity to lessen the impact of U.S. sanctions on its economy and also reduce China’s dominance in the region.
“The world of oil is the world of figures, great money, and continuous readjustment of the power balance within the OPEC organization and among oil majors,” Bininachvili told Tehran Times.
According to Bininachvili, although for the time being Russian policy is obviously in contrast with the U.S. [U.S. has been one of the main driving forces behind the recent OPEC decision], they prefer keeping up a good relation with Saudi Arabia in order to impede China’s further economic penetration into the Persian Gulf region even at the cost of being in line with U.S. policies.
So, what could be expected is that Russia is going to add, at least, something around the same 300,000 barrels per day (bpd) that they cut in accordance with the initial agreement.
Iran & other members
As for Iran and other members like Venezuela, Iraq, Angola, Nigeria and Libya, unfortunately compared to Saudi Arabia and Russia they do not hold a very strong stand.
Due to a combination of factors Iran has only about 4 million bpd of output capacity of which 2.5 million bpd is being exported. According to the initial accord, the country is producing at its maximum allowed ceiling, so Iran is not required to make any cuts nor it’s able to make any further increases.
As for Venezuela, the country’s oil industry has fallen down dramatically due to internal political turbulences and also low oil prices. Although the state oil company PDVSA announced that they have the ability to boost crude output by 1 million bpd by end of the year, their oil minister said on Friday this goal [increasing output] would be “a challenge” for PDVSA.
Libya, Angola and Nigeria, too, don’t seem to be able to increase their output even if they were allowed to.
What to expect
In the end, although OPEC didn’t mention any clear amount for the agreed increase and also didn’t give any information regarding the pattern of allocations, the organization’s official statement said members agreed on returning to their initial 100 percent compliance starting on July 1. Considering all the aspects, despite OPEC’s states on securing all members’ interests, what we should expect in reality is a gradual increase between 600,000 to 800,000 bpd in oil supplies which most of it would probably come from Russia and Saudi Arabia.
Since as UAE’s Energy and Industry Minister Suhail Mohamed Al Mazrouei, who is also the current chairman and president of OPEC, said at a press conference following the meeting, “[it] would not make sense if we allocated production to a country that cannot produce it”!