Counting Down to Vienna

Almost everyone seems to agree that US$80/b – at least in this current environment – is not conducive for the oil business. While oil producing countries are reaping benefits right now, they are also worried that prices sustaining at this level will cause demand destruction in key markets like China and India, which have underpinned global oil growth over the last year. 

They are also, correctly, worried that the longer oil stays at this level, the greater the reaction by US shale producers will be, causing another crash further down the line. OPEC is worried that this derails their carefully calculated alliance over the past 18 months that has seen an unprecedented level of cooperation and that implosions in Venezuela and sanctions against Iran will exacerbate the situation. 

And most of all, American President Donald Trump, who took to Twitter once again recently to accuse OPEC of colluding to keep prices high – as the Republicans worry that high pump prices for gasoline over summer will further erode political support in the upcoming midterm elections.

So as OPEC and the NOPEC alliance meet once again in Vienna on Friday (June 22) for their bi-annual meeting, the mood of the meeting has swung from the need to support oil prices to the need to manage oil prices. On paper, OPEC’s heavyweight fighter – Saudi Arabia – is pushing for higher production, supported by its allies Kuwait, the UAE and Algeria. Several other big producers including Iran, Iraq and Venezuela, however, don’t seem to agree and have threatened to veto any proposal for a production increase, with Iran stating that ‘we do not need to appease Trump and the market is well-supplied’. Russia, the leading producer in the NOPEC alliance is also pushing for higher production, and the countries in NOPEC look liable to be whipped into line. But OPEC decisions rely on consensus and if the countries cannot come to one, unilateral actions could trigger a return to the destructive free-for-all attitude within OPEC where producers compete for market share and depress prices as a result. After enduring three years of low prices, no one in the industry wants a return to that.

At the opening match of the World Cup 2018 in Moscow, Vladimir Putin and Crown Prince Mohammed bin Salman were spotted getting chummy, despite Russia thrashing Saudi Arabia 5-0. This has fuelled speculation that the two producers could be forging an alliance separate to OPEC, possibly jeopardising coordination within the oil cartel. Despite Iran and Iraq being very vocal about not agreeing to any supply increase, Russia has suggested that OPEC and NOPEC could begin gradually increasing oil production starting from July 1. That itself is not controversial – the November 2017 meeting predicted this, stating then that the world market was rebalancing more quickly than expected and a review of the supply freeze was required in June 2018. That requires cooperation, but as it stands now OPEC looks to be divided into two cooperatives – Russia, Saudi Arabia and their allies on one side and Iraq, Iran and Venezuela on the other. 

The butting of these heads will define the upcoming meeting and one can only hope that they will come to an agreement, given that previous disagreements have proved damaging.

Easwaran Kanason

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