From Bloomberg
Energy ministers from OPEC and its allies met to discuss prices and production cuts, in Jiddah, Saudi Arabia, Sunday, May 19, 2019. The meeting took place as tensions flare in the Persian Gulf after the U.S. ordered bombers and an aircraft carrier to the region over an unexplained threat they perceive from Iran, which comes a year after the U.S. unilaterally pulled out of Tehran’s nuclear deal with world powers and reimposed sanctions on Iranian oil.
Saudi Arabia and other key producers in OPEC signaled their intention to keep oil supplies constrained for the rest of the year, while pledging to prevent any genuine shortages.
It was less clear how far Russia, their main partner in the wider OPEC+ producers’ coalition, shared that view. While most nations at a meeting in the kingdom on Sunday supported extending production cuts to the end of 2019, Russian Energy Minister Alexander Novak talked about potentially relaxing the curbs and wanted to wait and see what happens in the next month.
“We need to stay the course, and do that for the weeks and months to come,” Saudi Energy Minister Khalid Al-Falih told reporters after the meeting in Jeddah. The kingdom “isn’t fooled” by crude prices, currently above $70 a barrel in London, and believes the market is still fragile.
The contrasting messages underscore the uncertainty in the global market. If ministers don’t agree to an extension next month, the production cuts that ended the worst oil-industry downturn in a generation will expire. Yet their decision is clouded by the impact of U.S. sanctions on Iran and the risk to demand from President Donald Trump’s trade war with China.
In a market where the preponderance of risks are on the supply side — with Venezuela and Libya also facing disruptions — what Saudi Arabia chooses to do with its ample spare production capacity may be the market’s deciding factor in the coming months.
The kingdom has so far been trying to strike a balance between its own need for higher revenues to fund government spending, and pleasing Trump by filling any supply gap created by his moves against Iran. On Sunday, Al-Falih gave a strong indication that prices were the priority and he wasn’t about to open the taps.
Saudi Freeze
“My recommendation to my colleagues will be to drive inventories down gently” by extending the current cuts into the second half, Al-Falih said. He acknowledged consumers’ concerns about potential supply disruptions and promised to make sure “no refinery, no customer is left without their requirement of crude oil.”
Continuing the OPEC+ accord into the second half wouldn’t rule out a production increase. Saudi Arabia has been cutting far deeper than required under the deal and could boost output by about 500,000 barrels a day — equivalent to almost half Iran’s exports — without breaching its limit.
Yet Al-Falih said production in May and June will be held at the current level of 9.8 million barrels a day. Regardless of what OPEC+ decides next month, output in July won’t exceed the kingdom’s limit in the deal of 10.3 million barrels a day, he said.
It’s unclear exactly how much Iran is exporting, and so far demand for replacement crude from Tehran’s customers has been lower than expected, Al-Falih said.
Support for Extension
The meeting of the Joint Ministerial Monitoring Committee, which oversees the deal between the Organization of Petroleum Exporting Countries and its allies, was generally supportive of an extension, and nobody rejected the idea, Nigerian Oil Minister Emmanuel Ibe Kachikwu said in an interview.
Even so, the committee didn’t make a formal recommendation to prolong the supply curbs, concluding instead that further monitoring of the market was necessary, with a focus on managing inventories and keeping supply and demand in balance.
The fate of the group’s production cuts, which amounted to about 2% of global supply last month, will be decided on June 25 to 26 in Vienna, just days before they expire. That’s a volatile situation for the oil market, giving traders very little time to adjust if there’s an unexpected shift in policy.
Russian Reticence
Russia’s Novak affirmed his commitment to the historic alliance, saying the production cuts have “proved very efficient.” That counts as high praise from the taciturn official, but before and after the meeting he also spoke of the possibility of relaxing the cuts.
“We need to promptly react to the situation now and potential developments in the second half,” Novak said before the meeting. “If the demand grows, if a deficit is there, we are ready to consider a relaxation of the current parameters, partial output recovery.”
Extending the deal is also on the table, and Russia would comply with any agreed output limit in the second half of 2019, Novak said.
All members are keen to avoid a repeat of last year when the group — faced with very similar circumstances in Iran — boosted output too fast and triggered a fourth-quarter price slump. Other ministers in Jeddah, including those from Oman and the United Arab Emirates, also said the group should stay the course.
“The job is not complete,” U.A.E. Energy Minister Suhail Al Mazrouei told reporters on Saturday. “We are still seeing some inventory buildup and we need to attend to it.”
