When OPEC and OPEC allies gather in the Arabian city of Saudi Arabia in Jeddah this weekend, their talks will dominate by a group member who is not there: Iran.
While Donald Trump, the US president pushes oil exports from the Islamic Republic with sanctions, discussions among other producers like Saudi Arabia and Russia are likely to focus on whether to fill a resulting supply gap. Their talks take place in the midst of political tensions in the Middle East, where Riyad says oil tankers and the pipeline network were attacked this week.
Ed Morse, head of commodity research at Citigroup Inc. in New York, said this is a critical issue. “This is a very tight physical market that faces significant supply losses and signs of possible disruption in the Persian Gulf.”
Oil prices, keeping close to $ 72 a barrel in London, may climb this summer shortly after global supplies are strained by Trump’s strikes on Iran and hasty geopolitical tensions from Venezuela to Libya. But since the opening of the tapes could soon lead to declining prices, Riyadh and Moscow face a dilemma over their next move.
“They have to keep supply chains for now,” said Derek Brower, a director at RS Energy Group Inc.’s consultant. “The market requires OPEC to recognize that the balance sheets will weaken later this year and also next year.”
The two oil giants run a coalition known as OPEC +, made up of producers from the Organization of Petroleum Exporting Countries and beyond, which has limited production this year to keep balanced world markets. A commission that includes all major members alongside Iran will review market conditions on Sunday before the full group meets next month.
While the White House shakes its crackdown on oil sales to Iran, Saudi Arabia is under pressure to compensate for the rise in its crude production. Trump tweeted on April 26 that he would secure the promise of co-operation of the kingdom.
Iran’s oil product has fallen more than 30 percent since May, data overturned by Bloomberg’s appearance when Trump abandoned an agreement on the country’s nuclear program and announced that financial sanctions would be re-imposed. Production may sink more this month, at the lowest since the Iran-Iraq war in the 1980s, predicts the International Energy Agency.
However, a decision by the Saudis and Russia to shift from restrictive supply to its growth is not straightforward.
There is still no clarity as to whether Iran’s largest customer, China, will agree with the US ban and how far the product will eventually fall. Saudi Arabia is reluctant to repeat its previous year’s experience, according to Morse of Citigroup, when it boosted production in anticipation of a failure that never came.
Riad supported production at record levels last autumn after US officials promised to shut down Iranian supplies, only to see the prices plummet 35% in the fourth quarter after Trump’s administration allowed some flow to continue. Saudi Arabia Energy Minister Khalid Al-Falih said late last month that while the kingdom will ultimately host Iran’s clients, it will not hurry.
“The Saudis have been very conservative when it comes to increasing barrels in the market,” said Mohammad Darwazah, a director at Medley Global Advisers in New York. “Saudi policy makers will surely have a tough needle to shut down, while balancing US pressure to replace Iranian barrels with their fiscal needs.”
A Saudi move to dramatically increase production and divert Iran’s customers may also be a tough test of OPEC unity.
OPEC nations are currently constrained to limit their products, which last until the end of June, when the agreement may expire or be renewed. Saudi Arabia has the right to increase production by about 500,000 barrels a day from last month’s level, or about 5%, and remains within the agreed limits.
But losses in Iran may be much larger, potentially spiraling for 900,000 barrels a day according to Goldman Sachs Group Inc. (NYSE: GS), and may require a larger and more controversial increase from the kingdom.
Such action is unlikely to be formally ratified when OPEC + meets in late June after the group’s agreements require unanimous approval and Iran will stop supporting it.
Saudi Arabia, Russia and others with idle production capacity may continue regardless, but risk tensing the already strained group relationships at the breakpoint. Iranian oil minister Bijan Namdar Zanganeh warned on May 2 that OPEC was heading for a collapse.
“It is very clear that Iran will not sign up for any OPEC output growth beyond the current quotas,” said Helima Croft, commodity strategist at RBC Capital Markets LLC. “In the current context, Arabia plans to fill Iranian barrels, can be seen as an action of economic war.”
If discussions this weekend can be difficult, the OPEC ministerial meeting next month, when Iran will be present, will be much tougher.
While the cartel has eroded a series of internal conflicts over its six decade history, recent tensions have been particularly acute. The friction between Riyadh and Tehran postponed the talks in two meetings to come close to last year and in December, Qatari left the organization after 57 years of membership between a disagreement with the Saudis.
Citigroup Morse said, “I can imagine that the June meeting be postponed” or “there is no consensus vote, not even consensus to reach.”/Investing.com