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Opec+ – if it ain’t broke, don’t fix it

The rejigged meeting is likely to maintain the status quo in global crude markets

Much of Russia's oil is exported to China, where President Putin was welcomed by President Xi Jinping earlier this month American Photo Archive via Reuters Connect
Much of Russia's oil is exported to China, where President Putin was welcomed by President Xi Jinping earlier this month

Opec+, the oil alliance led by Saudi Arabia and Russia, meets next weekend for what has been billed for many months as a “crucial” gathering of the world’s leading producers – but which may turn into a rubber-stamping of the status quo in global crude markets.

The meeting has been pushed back one day to June 2 and will be held virtually rather than in person as had been assumed for months, no reasons given.

The Opecologists will read all sorts of dark implications into the changes, but it’s probably no more than a bit of diary reshuffling after a tumultuous time in the Middle East oil heartlands.

Some point out, on the other hand, that when Opec+ is looking for a “slam-dunk” – a quickly-approved continuation of existing policy with a minimum of formal debate – meetings have tended to be virtual, rather than physical.

But that does not mean that there is nothing going on beneath the surface. In fact, Opec+ is facing some significant pressures that will be the subject of private and bilateral discussions over the next few days, before a fait accompli is presumably revealed via the internet.

Opec+ meetings are – as the participants repeatedly insist – about supply rather than price, but they must have at least one eye on the price of Brent crude when they discuss supply policy.

This has been anchored in a band of $80-$85 per barrel for the past month, standing on Sunday at $82.33 for the July contract. That is not necessarily a bad thing – one man’s range bound is another’s “Goldilocks level”, not too hot and not too cold.

At that price most Opec+ producers will be reasonably content. Saudi Arabia would probably prefer a bit higher to help fund the kingdom’s diversification strategy, Russia would like more to help it continue waging aggressive war in Ukraine, but it’s a figure the group of 22 producers can live with.

So, by the logic of the maxim “if it ain’t broke, don’t fix it”, that would suggest a continuation of the programme of restraint that has been in place most of the last year which, through a combination of individual country cuts and group-agreed reductions, takes something like 6 million bpd off global oil markets.

That’s a significant sacrifice on the part of Opec+, but one deemed necessary in the face of surging US oil production, currently the highest in its history at around 13 million bpd.

Given the Opec+ imperative to protect its share of global oil markets, it is inevitable that some producers are beginning to feel hamstrung by production quotas agreed a long time ago and under quite different market conditions, in both global and national contexts.

They see plentiful American oil going to Europe, and Russian and Iranian oil going to China and India and wonder when they will be allowed under Opec+ rules to compete more effectively for those markets.

Hence recent rumblings from Iraq that Baghdad would prefer a relaxation of the cuts at some stage in the near future, and the UAE’s plan to boost production capacity (not output) to near the 5 million barrel level, which it will probably hit next year, ahead of schedule.

Saudi Arabia is at the heart of this production-capacity conundrum, with current output around 9 million bpd compared to a reset capacity target of 12 million bpd.

Some African producers too would like to be able to sell more oil on global markets, in order to attract much-needed capital investment into their industries. Angola left Opec last year over this very issue, and Vienna will want to head off further defections.

Opec has been aware of the bottom-up pressure for some time, and appointed three independent consultancies – HIS, Rystadt and Wood Mackenzie – to look in-depth at the issue of Opec quotas. There could be some update from them at the upcoming meeting.

Another long-term consideration for the Opec+ policymakers is Iran. The country has been “in Opec” since inception, but not part of the quota deliberation since President Trump imposed American sanctions.

That has not stopped Tehran from exporting oil, though has added to the creativity with which it gets paid. The country produces 3 million barrels a day, of which roughly half gets exported, almost exclusively to China, and recently talked of its desire to push that to 4 million.

Some oil strategists suggest it is time to get Iran back in the Opec quotas tent, but that way is fraught with sanctions difficulties.

All that gives Opec+ policymakers a lot to be thinking of over the summer months, when they will probably leave the cuts where they are now, with the proviso they will be re-assessed in the autumn while the quota experts do their number crunching.

But – as ever with Opec – do not rule out surprises.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE

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