OPEC Reflects on a Month of Uncertainty and Decides to Stay the Course—at Least for Now
May 20, 2019
Over the weekend, key members of the Organization of Petroleum Exporting Countries-plus (OPEC+) met in Jeddah, Saudi Arabia. The purpose of the meeting was to allow the members of the Joint Ministerial Monitoring Committee (JMMC) to consider if the group’s existing market strategy might need to be altered in light of current oil market conditions and ongoing geopolitical events. Recommendations of the group would serve as guidance for the next scheduled OPEC meeting in June.
The meeting comes at a particularly sensitive time as markets are being stress tested and geopolitical tensions are on the rise. Less than a month ago, Secretary of State Pompeo announced the Trump administration’s intent not to renew the significant reduction exemptions (SREs) for buyers of Iranian crude and condensate when the current round of waivers expired on May 2. Waivers for purchases had been previously granted to Taiwan and seven nations, including China, India, Japan, South Korea, Italy, Greece, and Turkey. Italy, Greece, and Taiwan had already taken import levels to zero; China and India continue to import Iranian crude oil, albeit at reduced volumes, and South Korea still hopes for waiver relief due to its significant reliance on Iranian condensate.
In making the announcement, the administration continued to adhere to its “maximum pressure” messaging with respect to Iran, restated its intent to take Iranian (cash transacted) oil exports to zero, and strongly implied that the UAE and Saudi Arabia would more than make up for the loss of Iranian volumes. Since going to zero would imply removing an additional 900,00-1 million barrels per day of oil from the market, the administration’s announcement sent oil prices up over 3 percent, to above $74/barrel. For its part, Saudi Arabia—having been misled by earlier administration pronouncements regarding the exercising of waivers—committed only to continuing to assess market conditions and ensuring that markets remain adequately supplied. Saudi minister al-Falih has also noted that, if needed, the Saudis could increase supply while staying within the framework of the reduction agreement.
In the intervening month, however, a number of events have conspired to alter short-term views of market strength. On the demand side, heightened concerns over the state of the global economy have somewhat abated, although the recent failure of the United States and China to conclude a trade agreement has resulted in the imposition of additional tariffs, resurrecting the specter of a longer trade war.
On the supply side, the continued deterioration of conditions in Venezuela (exacerbated by ongoing power outages and heightened political tension) have been augmented by revived concerns over potential supply disruptions in Libya, Nigeria, Algeria, and Iraq. The widespread contamination of oil in the Druzhba pipeline system, last week’s incidents of sabotage to four oil tankers near the entrance to the Strait of Hormuz, outside of Fujairah, and drone attacks to pumping stations along Saudi Arabia’s strategic east-west pipeline only added to the concern. Presidential tweets and Iranian threats to respond to provocations supported more bullish sentiment. Meanwhile, oil exports dramatically increased from the UAE and (surprisingly) Angola. U.S. production remained robust although rig count declines evidenced a slowing of activity.
To no one’s surprise, the JMMC members (Saudi Arabia, Russia, the UAE, Iraq, Kazakhstan, and Nigeria) concluded their meeting with the assessment that despite heightened rhetoric and warranted apprehension, global stocks look more than adequate, and markets and customers appear well supplied—at least for now.
Of course, the JMMC is not a decisionmaking body, and its current (and ongoing) market assessments will be further scrutinized by the OPEC ministers and members of the broader alliance when they convene in Vienna next month. On the docket for that meeting is the decision on whether to extend the current cuts into the second half of the year. The hope of the member states is that, over the coming weeks, market conditions will become clearer, global stocks will continue to “gently” decline, demand will prove resilient, and the myriad of disruptive factors will somehow calm down.
Russian energy minister Novak indicated that he expects full restoration of Druzhba oil flows to Europe in the next few weeks while acknowledging that Russian producers are anxious to increase sales. Saudi Arabia, for its part, is doubling down on security following last week’s attacks, yet nonetheless finds itself in the enviable position of holding the lion’s share of global spare capacity and retaining ample headroom to increase supply while still remaining under its OPEC cap. Beyond field production, the Kingdom carries sizable inventory to allow it to quickly inject additional volumes into the market should the need arise. Yet all that said, expectations are that absent a dramatic change in market circumstances, any incremental production increases will likely be directed to first supply domestic demand for refining needs and summer burn. And in an ironic twist, Aramco has reportedly contracted for some of the (heavily discounted) Druzhba volumes to test its compatibility for combustion for power generation purposes, thereby freeing up more valuable domestic oil for sale or other use.
As indicated in previous notes, OPEC continues its quest for market stability—an elusive and fleeting objective in an increasingly complex world with no shortage of moving parts and unpredictable actors.
Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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