Oil prices, waiting for OPEC meeting

The upcoming OPEC meeting on June 22 is shaping up to be a contentious one, after news broke that the U.S. government asked Saudi Arabia to increase oil production before Washington pulled out of the Iran nuclear deal.

Earlier last week, news surfaced that the U.S. government asked Saudi Arabia to boost output to relieve pressure on prices. But Reuters followed up with a report on June 7, adding more context to that story. According to Reuters, a high level Trump administration official called Saudi Arabia a day before Trump was set to announce the U.S. withdrawal from the Iran nuclear deal, asking for more oil supply to cover for disruptions from Iran.

While the Trump administration’s request might irk OPEC members, with Iran obviously the most aggrieved, the apparent willingness of Saudi Arabia to comply with Washington’s request has ignited furor from within the group.

“It’s crazy and astonishing to see instruction coming from Washington to Saudi to act and replace a shortfall of Iran’s export due to their Illegal sanction on Iran and Venezuela,” Iran’s OPEC governor, Hossein Kazempour Ardebili, said in comments to Reuters. He said that OPEC would not simply comply with Washington’s requests. “No one in OPEC will act against two of its founder members,” he said, referring to Iran and Venezuela. “The U.S. tried it last time against Iran, but oil prices got to $140 a barrel.”

Just about every OPEC member outside of the Gulf is unable to increase production anyway, so it is of little surprise that they are opposed to higher production. Venezuela’s output is falling fast. Angola is also losing production. Libya and Nigeria seemed to have hit a temporary ceiling, with security issues always looming as a supply risk. Also, they don’t have official limits on their output as part of the OPEC deal, so there is little upside for them in supporting production increases from other countries.

From the non-OPEC camp, Mexico’s production is falling anyway, so it has little to no ability to respond to change in policy.

Ultimately, the only beneficiaries of higher production would be Saudi Arabia and Russia, and to a lesser extent some of the Gulf States like Kuwait and the UAE.

But, Saudi Arabia and Russia probably can’t simply allot themselves more production allowances without risking a full-blown revolt from the rest of the group. So, they will likely need to allocate more production to everyone, but even the act of deciding on a formula will also be highly contentious. Still, it will be somewhat of a formality for most members since they can’t increase production anyway.

So, there are a few possibilities from the upcoming meeting. First, Saudi Arabia and Russia convince the group to agree to an increase in output, and while everyone nominally is allowed to increase output a bit, the two top producers make up the lion’s share of the increase. That will require sacrifice from much of the group, who won’t be able to increase production and will have to stomach lower oil prices.

Another possibility is a breakdown in negotiations and Saudi Arabia and Russia go their own way, increasing output. Or, talks could breakdown and there is no change in output, although with the upside risk to prices, this seems unlikely.