Energy ministers and other delegates from the Organization of Petroleum Exporting Countries are
gathering May 25 in Vienna for a regularly scheduled meeting. But the stakes are far from regular
given volatile oil prices.
OPEC and some major non-OPEC producers
have largely complied with production-cut targets
implemented at the start of the year. OPEC agreed
to reduce production by 1.2 million b/d while
non-OPEC productions agreed to cut by 600,000
b/d of which Russia accounted for 300,000 b/d.
Amid much debate regarding OPEC’s next
move, Saudi Arabia and Russia both support extending the production-cut targets through Mar.
31, 2018. That news rallied oil prices, which earlier this month fell to 5-month lows. Analysts
largely blamed rising US oil production for counterbalancing OPEC’s efforts.
“The upshot is that the OPEC production agreement has so far merely brought about a shift in
market share,” said Hans van Cleef, ABN-AMRO
senior energy economist. “This confronts OPEC
with a devilish dilemma: support the oil price or
maintain market share.”
Van Cleef foresees three possible scenarios, which
he outlines as follows:
• The agreement extension is the most likely
scenario. “The problem is that this scenario has
already been priced in,” van Cleef said. “In this
case, the oil price will not rise much further than
$50/bbl in the coming months.”
• Another alternative is to drive oil prices
higher by surprising the market with a lower-
than-expected production ceiling. Van Cleef said,
“This option is possible as OPEC can cut output
faster than US oil producers can ramp it up.”
• A final scenario involves abandoning the
production ceiling to prevent any additional shift-
ing of market share. Van Cleef said this scenario
seems unlikely. “A cautionary note is in order…
this scenario did not seem very likely at the end
of 2014 either, but did become reality as OPEC at-
tempted to squeeze US shale oil producers out of
Other analysts comment
Morgan Stanley analyst Martijn Rats expects OPEC
will extend the production-target agreement at its
upcoming meeting. But in a research note issued
earlier this month, Morgan Stanley said it believes
the pact is “unlikely” to get extended again at a subsequent OPEC meeting.
Mahesh Radhakrishnan, Frost & Sullivan ener-
gy and environment analyst, said, “Oil companies
that are vertically integrated will be ideally posi-
tioned to optimize their operations as they will
have a stable downstream business, which usually
profits when oil prices are low.”
Regarding producing countries, he noted that
countries counting on oil and gas production for
more than 80% of gross domestic product face a
possible deficit in times of low oil prices.
US industry’s drilling technology has cut tight
oil production costs, allowing producers to boost
production despite low oil prices. Other countries
lacking this tight-oil technology need to seek collaborative opportunities, Radhakrishnan said.
Meanwhile, Iranian voters go to the polls this
month for a presidential election, which Royal
Bank of Canada analysts believe has important
implications for the durability of the nuclear deal
and sanctions relief that has enabled the return of
Iranian oil exports.
President Hassan Rouhani is expected to be
reelected. But his opponent, conservative cleric
Ibrahim Raisi, likely would support provocative
military and regional policies, said RBC’s Helima
Croft in a May 16 note. She believes such policies
already imperil the nuclear agreement.
“A sanctions snap-back could not only deter foreign investment in the Iranian energy sector but
could also curtail the country’s ability to sell its
barrels abroad,” she said. “Hence, we continue to
contend that Iran is one of the most underappreci-ated upside oil price risks in the oil market.”
OPEC faces choices