The Organisation of Petroleum Exporting Countries (OPEC) and its allies seem set for a contentious meeting this week to review whether to continue or unwind supply curbs put in place 18 months ago as supply risks increases.
Although the global oil gluts seems to have disappeared, recent Donald Trump’s comments have led to an increase in supply risk as Saudi Arabia and Russia have threatened to increase supply which OPEC and its Non OPEC allies have been trying to clear since early 2017.
Emmanuel Afimia an energy analyst at Afimia consulting Limited warns that terminating the agreement now may cause a free fall in oil prices to as low as $40-$50/barrel in a few months.
“OPEC and its allies will probably extend the production cut agreement beyond 2018 because current crude oil prices have not reached $100/barrel,” Afimia an energy analyst at Afimia consulting Limited told BusinessDay.
While the Trump administration’s request for lower prices might irk OPEC members, with Iran obviously the most aggrieved, the apparent willingness of Saudi Arabia to comply with Washington’s request has ignited furor from within the group. Ayodele Oni an energy partner at Bloomfield Law field expects OPEC to extend the production cut in order to allow for more favourable oil prices.
“OPEC production cut is not always a reason for higher prices, when there is any crises in oil producing countries especially countries in the Middle East it tends to lead to a sharp reaction in oil prices,” Oni told BusinessDay.
Abayomi Fewehinmi a Lagos based oil and energy expert thinks otherwise and is a bit sceptical about the meeting on June 22 as he expects OPEC decision to go either way.
The current situation seems a bit precarious for OPEC as every of its member outside the gulf cant increase production. Venezuela‘s production output is falling fast, Angola is also losing production, Iran, obviously is facing production outages from U.S. sanctions, so it likely can’t increase output even if it wanted to.
Also, Libya and Nigeria internal issues have led to inconsistent production. Officials from Iraq and Algeria made negative comments over the past week about the possibility of higher output, while from the non-OPEC camp; Mexico’s production is falling anyway, so it has little to no ability to respond to a change in policy.
Ultimately, the only beneficiaries of higher production would be Saudi Arabia and Russia, and to a lesser extent some of the Gulf States like Kuwait and the UAE.
“Despite all the razzmatazz, Saudi Arabia and Russia probably can’t simply increase production without jeopardizing a full-blown rebellion from the rest of the group. So, they will likely need to allocate more production to everyone, but even the act of deciding on a strategy will also be highly controversial,” an oil analyst told BusinessDay.
Some analysts wonder if this week’s meeting could not lead to the infamous 2011 meeting that fell apart over sharp differences in opinion, with Saudi Arabia wanting to increase production to ease triple-digit oil prices following the conflagration in parts of North Africa and the Middle East during the Arab Spring.
“But the Saudis were shot down by much of the rest of the group, which opposed lifting output. Former Saudi oil minister Ali al-Naimi said it was “one of the worst meetings we have ever had.”
US President Donald Trump accused OPEC of driving up oil prices last week, in a fresh swipe at the cartel’s agreement to cap production. “Oil prices are too high, OPEC is at it again, not good,” Trump tweeted on Wednesday.
Iran’s OPEC Governor Hossein Ardebili responded swiftly to Trump comments by defending the position of OPEC for higher oil prices.
“You cannot place sanctions on two OPEC founder members and still blame OPEC for price volatility,” Iran’s OPEC governor, Hossein Ardebili, said in a statement. “This is business, Mr. President, we thought you knew it,” Iran’s OPEC governor added.
It is at least the second time this year that Trump has lashed out at OPEC over spiking oil prices. In April, the president threatened the group of oil producers that its efforts to push prices higher would “not be accepted,” although he did not specify what steps, if any, his administration might take.
“Currently, American citizens are complaining about the high price per litre of petroleum products which is leading to Trumps complains,” Afimia told BusinessDay.
With the upcoming OPEC meeting scheduled to be held on Friday and a pre-OPEC meet between Saudi and Russia on Thursday, the decisions arising out of those meetings will set the tone for oil prices for the rest of the year ahead.
Despite growing concerns over higher OPEC crude production; leading global investment bank Goldman Sachs still expects the price of oil to climb back above $80 a barrel over the coming months as the firm reaffirms its previous Brent forecast of $82.50 per barrel.
“Our updated global supply and demand balance continues to point to further declines in inventories and higher oil prices in the second half of 2018,” the bank said.
Analysts at Goldman said the prospect of OPEC producers announcing an increase to crude production levels later this week could actually have a bullish impact on oil prices.
“Our updated fundamental oil balance shows that the oil market remains in deficit with resilient demand growth and rising disruptions requiring higher core OPEC and Russia production to avoid a stock-out by year-end,” New York based investment bank said.
Brent crude, Nigeria’s benchmark grade traded at $74 per barrel Monday, according to Bloomberg data.
Production has also been relatively stable since militants ceased blowing up pipelines, touching a two-year high of 1.8 million barrels in May, according to OPEC data.
