With the OPEC meeting having started a little under two hours ago, it appears that the premature optimism raised yesterday about yet another imminent production freeze deal may have been mostly hot air. Indeed, yesterday’s bounceback in oil was driven by the various reports of a potential reintroduction of a ceiling on production after the previous ceiling was scrapped in December. The WSJ ran a story suggesting that the willingness is shared by Saudi Arabia as well as smaller producers in Nigeria, Qatar, Algeria and Venezuela. However, like in Doha, Iran appears to be against a wholesale supply cap after its oil minister said late on Wednesday he’d prefer individual national output quotas rather than an overall production ceiling, and added that he doubted a deal is possible. Meanwhile, Saudi Arabia is willing to live with either outcome.
This is a recap of what oil ministers said just before they entered a close door session which is expected to conclude at 10 am Eastern:
- Saudi Arabia’s minister said OPEC’s current strategy was working and that group should reestablish a production ceiling “when necessary”; click here for summary
- Iran says an OPEC output ceiling without country quotas means nothing; Iran aims to pump 4.8m b/d in 5 yrs
- Kuwait doesn’t think a ceiling is necessary
- Iraq says OPEC will consider 32.4m b/d ceiling, which is same as April’s output level, according to secondary sources
Like in Doha, while Iran will be the scapegoat for any lack of deal, the question is what Saudi Arabi’s strategy is. For the answer, we go to Saudi Arabia’s new Energy Minister Khalid Al-Falih who spoke to reporters at start of OPEC’s ministerial conference in Vienna. This is what he said via BBG:
On OPEC strategy, market balancing:
- Sees supply and demand coming into balance
- Mkt is not oversupplied; just inventory that needs to be absorbed
- We will be gentle with our approach
- Demand is robust; non-OPEC supply declining
- Everybody is satisfied w/ mkt
- OPEC strategy is succeeding
- Saudi Arabia would welcome non-OPEC coordination
- When supply exceeds demand it isn’t sustainable
- Saudi Arabia doesn’t want over-investment in oil supply
On prices:
- Market will rebalance at a higher oil price than today
- Saudis could withstand a longer period of lower prices
- Oil supply disruptions are supporting mkt recovery
- Nobody can know what is equilibrium price of oil mkt
- We think prices are on the way up
- Saudi Arabia is concerned about effect of low prices
On production ceiling:
- Saudi doesn’t want to see reduction in OPEC output
- OPEC should go back to production ceiling when necessary
On Saudi capacity:
- Saudi Arabia oil production capacity is 12.5m b/d
- Saudi will respond to oil mkt if there’s a shortage
- Will have enough spare capacity to meet any demand
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As noted above, while Saudi Arabia remains the most important OPEC player, the market’s focus will be on what Iran does, and as Bloomberg reports, the middle-eastern nation resisted overtures from OPEC’s largest producer Saudi Arabia to restore a production target scrapped at the group’s last meeting in December.
“I don’t agree with an overall output ceiling for OPEC,” Iranian Oil Minister Bijan Namdar Zanganeh said Thursday, before a meeting of the group in Vienna. Zanganeh wants the organization to return to a country-quota system, which he said might be difficult to achieve at today’s gathering. This happens after Saudi Arabia signaled on Wednesday it’s ready to consider a surprise deal with fellow OPEC members, attempting to mend divisions that had grown so wide many dubbed the group as good as dead. Then again, Saudi Arabia did the same in Doha, only to scuttle a last minute deal excluding Iran, as a result of a last minute change of heart. Furthermore, not only the UAE and Kuwait, but even some of the poorer nations realize that chances are virtually nil of a deal emerging today:
- KUWAIT ACTING OIL MIN: NO NEED FOR OUTPUT CEILING
- IRAQ’S DEP OIL MIN: DOESN’T EXPECT DECISION ON OUTPUT FREEZE
- ECUADOR DOESN’T EXPECT DEAL ON INDIVIDUAL, GROUP OUTPUT LIMITS
Even Nigeria was skeptical:
- NIGERIA DOESN’T EXPECT DEAL TODAY ON OUTPUT CEILING: MINISTER
The silver lining would be if instead of ending in acrimony, the Vienna meeting showed some tentative warming among the competing former carlet members: although OPEC regularly ignores its own output targets and there was no suggestion anyone would cut production, even token gestures could show a renewed unity and lift prices. Options under discussion included a new ceiling of 32 million barrels a day, said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. That’s close to the 32.4 million barrels a day the group estimated it produced in April.
Here the focus will be on Saudi Arabia: Bloomberg adds that while any deal will depend on Iran, which until now has rejected any cap on its production, while Saudi Arabia appears to once again be shifting its tone.
Despite the obstacles to a deal, Riyadh’s change of tone is striking and may reflect the desire of Khalid Al-Falih, who last month became Saudi Arabia’s first new oil minister in more than 20 years, to start his tenure with a successful meeting.
Should the meeting end in an actual deal, it would be a major breakthrough, as introducing a ceiling would show that “OPEC is still important to the oil market,” Gary Ross, chairman of PIRA Energy, a New York-based oil consultant, said. It would signal that “despite political differences, they can work together to achieve similar economic interests — this is certainly a more positive outcome than the market expected.”
That said, a deal would be a shock. Last month, only one of 27 analysts surveyed by Bloomberg said they expected an output target from OPEC’s meeting.
The conciliatory message is an attempt to end a dark period for OPEC in which some analysts declared the organization effectively dead. In 2014, Saudi Arabia and its Gulf Arab allies decided to ditch production constraints in favor of a market-share strategy and prices crashed, bringing financial pain to many members and causing several rancorous meetings.
Even without a deal, OPEC will take solace in substantially higher oil prices than those seen in December, or even the Doha round, which has been pushed constantly higher from 12 year lows on precisely the expectations of supply cuts, which become even more improbable with every rise in oil prices. This week’s diplomatic maneuvering coincides with an oil price flirting with $50. “From the beginning of the year until now, the market has been correcting itself upward,” U.A.E. Oil Minister Suhail Al Mazrouei told reporters in the Austrian capital on Tuesday. “The market will fix itself to a price that is fair to the consumers and to the producers.”
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Finally, here is the take of Bloomberg oil strategist Julian Lee on what today’s non-announcement would mean. For him, OPEC oil ministers need to agree overall output target for group’s 13 members when they meet later today in order to convince mkt participants of OPEC’s continued relevance.
- Failure will deepen divisions between rich countries of Arabian Peninsula and other OPEC members who want higher prices
- Price hawks like Venezuela will see failure to agree target as sign that group doesn’t consider their needs
- Deal will signal ability of members to work together after failure to agree output freeze in Doha in April
- Overall target w/out individual country quotas will not restrict actual production
- Unlike Dec., there has been lots of pre-mtg shuttle diplomacy between various delegations in Vienna, suggesting that positions are being agreed in advance of formal mtg
- Saudi Arabia said to be considering reintroduction of target
- No firm proposal has been made, but matter has been raised by several countries
- Iran wants individual country targets, but doesn’t expect this to be agreed
No matter the final outcome, expect a volatile reaction when the OPEC headlines start hitting around 10am Eastern; we would not be surprise to see a dip lower in crude following another disappointing conclusion only to be followed by another mysterious levitation which pushes WTI above $50 later this morning.
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