Another OPEC+ Cut Seems Likely—But Not Very Consequential

As OPEC+ goes into its weekend meeting, the second biggest news is that some reporters are apparently not invited to the event. (My suggestion: if you miss attending the event, get in a crowded New York subway car and shout out questions. It’s pretty similar.) The oil price, which weakened based on fears of a U.S. default, continued to weaken after the debt ceiling bill passed the house, apparently because of higher U.S. oil inventories. The IEA’s projection that the market will be undersupplied by a whopping 2 mb/d in the second half of this year does not appear to be moving traders.

And Saudi Energy Minister Prince Salman’s warning to speculators did not move traders either, which could be a big mistake. It was once said don’t get in an argument with someone who buys ink by the barrel and paper by the ton, and it might also be said don’t short the market against someone who sells barrels—or not.

It seems certain that the price—and its current trajectory—is not what OPEC+ wants, or at least not the Saudis, since they have reduced quotas other times when Brent dropped towards $70. At the same time, there is some concern that the Saudis might be unhappy with the apparent poor compliance by Russia, which claims to have cut production but whose exports seem to be holding up. The Russians have a long history—going back to Soviet days—of not meeting promised quotas and the current sanctions have so disrupted their trade that they presumably feel no claims they make can be refuted with any certainty, although tanker trackers would surely disagree.

The OPEC+ meeting will undoubtedly feature many calls for better quota adherence (the world’s easiest prediction), given that most of the members are either incapable of meeting quotas or are adhering to them, and so don’t object to complaints aimed at scofflaws. Okay, Gabon is over quota but by 20 tb/d, according to IEA estimates, but that is not exactly flooding the market. More important, the U.A.E. remains about 10% over quota which is presumably earning them some Stern Talking To by a certain neighbor. At this point, more impactful action seems unlikely. (Yes, that’s not a word, even if Word doesn’t correct it.)

A new quota cut seems likely to be announced this weekend, probably about 1 mb/d which will translate into an actual reduction of perhaps 400 tb/d, mostly from Saudi Arabia. The bulk of the members will shrug it off, but the UAE
UAE
and Russia will likely resist, de facto if not verbally. Given current (and likely near-term) demand for oil from OPEC+, that should not cause a major price move, but will put a floor on prices and nudge Brent back up towards $80, at least in the short term.

Of more concern is the longer term outlook for Saudi production. As of now, production is close to all-time highs and even a new cut from July 1^st will leave them with robust sales. Still, if the market does not tighten as expected, that could change. After all, Saudi—and OPEC—production was high in 2014 also but soaring shale oil production apparently represented such a threat (I refuse to use the word ‘existential’) that they stood aside and let prices collapse.

And market expectations remain highly uncertain, something most forecasters tell their pillows every night. As mentioned, the IEA expects a 2 mb/d shortfall for the second half of the year, but this includes an assumption that Russian production will decline by 600 tb/d and Chinese demand will grow, year-over-year, by more than 1 mb/d, while production in the U.S. is projected to largely flatten out. Quite possibly, the actual ‘shortfall’ will be 1 mb/d less with slower growth in China and better supply from the U.S. and Russia.

A weaker than projected market in the second half would hardly crash the price of oil, but rather retard any move towards $100 that some anticipate. Longer term, if supply creeps up from Iran, Iraq, and Venezuela, as well as restoration of some production in Angola and Nigeria, while U.S. shale fails to peak (despite many pundits predicting same), then it could be that $80 Brent is not sustainable. Much of that depends on a combination of reduced resource nationalism, better governance, and relaxed (or avoided) sanctions.

Granted, I did not expect the 2014 Saudi decision to stand aside and let prices drop to discourage then-booming shale production, but it doesn’t seem that the combined threat to their market share and/or quota nonadherence do not seem adequate to encourage another price collapse, at least not yet. Yes, it is possible in the next few years, but as doctors always say to older people, we don’t need action at this point, but rather watchful waiting.