OPEC: More is Less

Published on June 22, 2018

All things considered, Saudi Arabia’s Energy Minister Khaled al-Falih did a pretty impressive job in fudging the math and messaging of today’s OPEC meeting to satisfy the sharply juxtaposed demands of both Iran and President Trump.

*** Despite the nominal one million bpd of added crude supply cited by al Falih and other OPEC officials, the actual additional crude that OPEC+ will be bringing to market is more likely to be between 600,000 bpd to perhaps as much as 800,000 bpd (see SGH 6/20/18, “OPEC: A Deal Taking Shape”). More importantly, Saudi officials are indicating an implicit near-term price cap target around $75 a barrel, subject to review at OPEC’s extraordinary meeting in September. ***

Four quick points to clear some of the confusion over the outcome to the OPEC meeting:

** All eleven OPEC member states will make a best effort to increase their collective output on a pro rata basis to bring down the “over-compliance” to the 2016 Vienna output cuts to 100%. That roughly translates into about 700,000 bpd of OPEC oil, to which Russia and the other non-OPEC oil producers are expected to add another 300,000 bpd in their meeting with OPEC tomorrow, which is how al Falih got to the one million headline nominal figure.

** The one million bpd figure did not make its way into the official OPEC statement, nor did any mention of by when or which OPEC member producers would be increasing output, in deference to Iranian objections. Only Saudi Arabia, Kuwait, and the UAE in any case have enough spare capacity to get anywhere near 700,000 bpd, and in theory output above their pro-rata share would require the blessing of the other OPEC members.

** Although the added OPEC+ output formally begins July 1, both the Saudis and the Russians have already been increasing output and will continue to do so, albeit gradually. The lower 600,000 bpd was the figure most frequently cited by the Saudis in their briefings on the meeting sidelines and was repeated in the meeting to keep the Iranians on board. It seems likely the additional Saudi-Russian led output will be closer to 800,000 bpd by year-end.

** The agreement today will be reviewed at the extraordinary OPEC meeting in September. Output could be adjusted up, or down, depending on the review of global demand and supply. In particular, further declines in Libyan and Venezuelan output could easily offset increases from Saudi Arabia and Russia. That could mean the need for a considerable output increase by Saudi Arabia, especially as the imposition of the US sanctions on Iran approaches.

The Trump Factor

All said and done, Trump was an exceptionally influential factor in the OPEC deliberations, much to Iran’s annoyance. The OPEC countries were no doubt thankful Trump’s threatening tweets today were aimed at the Germans and the European Union.

This Trump factor drew nearly as much attention in the both the meeting itself and on the sidelines as the actual agreement. It is widely understood, for instance, that the Saudis put the one million figure into the media primarily to deflect or at least delay public tweets or comments by President Trump during the OPEC meeting that would have seriously undermined the fragile consensus Saudi officials were struggling to pull together.

Iran was the primary hold-out, though its anger over the US factor is widely shared by the other non-GCC OPEC members. At one point yesterday, Iranian Oil Minister Bijan Zanganeh threatened to derail the deal altogether as he stormed out of the Joint Ministerial Monitoring Committee meeting after being denied the floor to question the estimated supply shortfalls.

Iran was also understood to have demanded today’s statement include a formal OPEC condemnation of US sanctions being imposed on OPEC member countries, which Tehran clearly did not get.

The NOPEC Threat

There is another concern hanging like a dark cloud over  OPEC going forward: not only is the close Saudi attention to US desires for low oil prices amid the confrontation with Iran a factor, but so is the US threat to press ahead with the “No Oil Producing and Exporting Cartels Act,” or NOPEC bill. The bill, which proposes making the cartel subject to the Sherman antitrust laws, has been stalled in Congress since 2007.

Both President Bush and President Obama threatened to veto the bill for its threat to commerce and international relations in potentially tying up a few dozen other countries as defendants in US courts and US lawyers seeking damages. President Trump, however, is much more of a wild card, and could voice his support for the bill.

The odds that it passes are small but rising. Neither House Speaker Paul Ryan nor Senate Majority Leader Mitch McConnell were in positions of power when a similar bill passed both houses of Congress in 2007 with strong margins. Majority Leader McConnell is an internationalist by experience and stubborn by nature, and may move to block the bill.

We are uncertain whether retiring Speaker Ryan, who is now a lame duck, will stand against the pressure to schedule a House vote, especially if the President is pushing for the bill. The US legislative threat, as damaging as it might be more broadly if it ever became law, is nevertheless likely to hang over the next round of OPEC deliberations in September, especially if prices are again surging.

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