OPEC Close to Agreement to Open the Oil Taps
With or without Iranian cooperation, extra barrels of crude could help meet rising demand. But there’s still reason to fear a price spike later this year.
Big oil-producing countries seemed poised to throw in the towel on an 18-month-long effort to restrain crude production and prop up oil prices by offering up to 1 million additional barrels of oil a day for the thirsty global market.
While that might take some sting out of high oil prices in the near term, it likely won’t be enough to offset continued declines in oil exports from countries like Venezuela and Iran — meaning the possibility of a painful price spike this autumn with few tools left to fight it just ahead of crucial U.S. elections.
The Organization of the Petroleum Exporting Countries is trying to cobble together a compromise agreement on Friday in Vienna, after a week of sniping between member countries like Iran that want to keep production steady to push up prices and those like Saudi Arabia who are willing to open the spigots.
This iteration of the biannual meeting has been even more contentious than usual because U.S. President Donald Trump has repeatedly blamed OPEC for high oil prices and called for more production, and countries like Iran were loath to seem to be dancing to his tune.
“This is a repeat of the classic hawks-versus-doves saga, which OPEC knows well,” said Matthew Reed, vice president at Foreign Reports, an energy consultancy. “The hawks want to squeeze every dollar out of fewer barrels while the doves take the long view that high prices can hurt demand,” he said.
Many OPEC members, plus observer Russia, essentially acknowledged that the strategy adopted a year and half ago to cut oil production to shore up very low crude prices has worked only too well. While the group, plus Russia and nine other major oil producers, aimed to cut output by about 1.2 million barrels a day, later expanded to 1.8 million barrels, it actually went much further, thanks in large part to the implosion of Venezuela’s oil industry.
As a result, prices rebounded from about $27 a barrel back in 2016 to almost $75 a barrel this spring. Pricey oil spells trouble for big oil consumers like China and the United States, where gas prices are up to nearly $3 per gallon — a 25 percent increase over the previous year and a four-year high.
In the end, the group was reportedly eyeing a compromise agreement that would walk a middle ground between the big production increases urged by Russia and Saudi Arabia and Iran’s hawkish stance.
Reuters reported that the group could pledge to boost production by about 1 million barrels a day, which would erase a big chunk of the 2017 production cuts. On Thursday, Saudi Arabia’s oil minister, Khalid al-Falih, warned of a big crude shortfall later in the year unless OPEC opens the taps, and suggested 1 million extra barrels a day would be a good start.
But it’s not clear that OPEC will reach a consensus after all. Iran, which all week has resisted raising production, took a harder line on Thursday and then left the meeting. “I don’t think we can reach an agreement,” Iran’s oil minister said, according to Bloomberg. OPEC needs unanimity to change output quotas.
If Iran’s resistance to extra production means no agreement is possible on Friday, the main petrostates, led by Saudi Arabia, could unilaterally raise production as they have in the past.
“Doing nothing is not an option and consensus is secondary when critics have nothing to offer,” said Reed of Foreign Reports. “Together, Saudi Arabia and Russia will decide what to do next, and they’ll rally as many OPEC and non-OPEC producers as they can.”
Saudi Arabia, the dominant member in OPEC, spearheaded both the big cutback in 2017 and this week’s push to reverse course for three main reasons. First, as al-Falih noted, the global oil market has gotten a lot tighter as surprisingly robust demand for oil has gobbled up excess supply.
Second, adding more barrels placates Russia, which is eager to ramp up production. Riyadh is eager to make sure its partnership with Russia endures, since it makes it easier to influence the world’s biggest commodity market.
“Keeping Moscow happy with the OPEC-plus deal is one of the key goals for Riyadh here,” said Riccardo Fabiani of London-based energy consultancy Energy Aspects.
Third, Saudi Arabia has a lot of pressure from Washington to increase output and lower oil prices as Americans head into peak driving season, with a midterm election just over four months away. The United States still guarantees Saudi security — providing billions in arms and backing Riyadh’s war in Yemen, giving U.S. policymakers some leverage over the oil kingdom.
“Oil prices are too high, OPEC is at it again. Not good!” tweeted U.S. President Donald Trump last week. There is also renewed frustration in Congress with OPEC’s discipline at boosting prices; a lawmaker is again seeking to apply U.S. antitrust law to the oil-exporting cartel.
Oil’s huge importance for the United States, the world’s biggest oil consumer, is a big reason Iran and Venezuela have resisted taking action to lower prices.
“They feel increasing production would only support the U.S. economy,” said Fabiani. “Iran and Venezuela have nothing to gain from a political or geopolitical perspective by increasing the production quota.”
In reality, though, the bigger problem on the horizon is not OPEC’s past discipline, but the Trump administration’s own actions. It walked away from the 2015 Iran nuclear deal in May and reimposed tough economic sanctions, including a sharp limit on Iran’s oil exports. That could knock off as many as 1 million barrels a day off the market by this fall, which by itself could erase OPEC’s decision this week.
“Trump’s tweet should be read as his concern that taking Iranian barrels off the market will lead to a politically damaging increase in prices,” said Antoine Halff, the former chief oil analyst at the International Energy Agency (IEA) now at Columbia University’s Center on Global Energy Policy.
Iran isn’t the only threat facing the oil market — and potentially the global economy. Venezuela’s oil production continues in free-fall, and could fall from 1.5 million barrels a day this spring to 1.2 million barrels a day or less by the end of the year. And Libya, whose oil industry has never fully recovered from the 2011 uprising and years of internecine fighting, has seen fresh threats to its diminished output just this week, causing a drop in oil production of 450,000 barrels per day.
In recent years, especially the last time U.S. sanctions took aim at Iranian oil exports, U.S. oil production rode to the rescue. And while U.S. oil producers are going gangbusters and pumping at record levels of about 10.4 million barrels a day, that energy boom is hitting a wall as well. There’s a limited amount of pipeline capacity to ship oil out of Texas oil fields, which means some smaller producers will have to shut down or limit output for the next year.
Those bottlenecks constrain the United States’ ability to act as a shock absorber for the global oil market if prices jump. And the prospect of continued growth in the demand for oil coupled with the near-certainty of big supply disruptions all but ensures OPEC will have to meet again in coming months to find a fresh solution.
“An emergency meeting can’t be ruled out later this year,” said Reed.
It won’t be as easy to calm the market as it was this week. OPEC’s spare capacity — the amount of oil production that can quickly be brought online, mostly from Saudi Arabia — is quickly shrinking. The IEA projects that nominal spare capacity could fall as low as 2.5 million barrels per day next year, a three-year low. Actual spare capacity is likely a good deal less for various technical and political reasons.
“If demand grows at the same pace in 2019 as it is now,” said Fabiani, “there may not be the ammunition to contain rising oil prices.”