OPEC: Where are oil prices heading?

Dr. Mohamed A. Ramady

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It has been a turbulent few weeks with oil prices reaching $80 a barrel and then falling back erasing around $ 4-5 gains with prospects of further falls due to headline news of impending oil production ramp up by several key oil producers.

This has left both speculators and energy dependent countries like China and India wondering whether the recent falls would continue, as India especially has raised concerns about the recent oil price rises, or an aberration and if oil prices would once again rise above the $80 benchmark.

A closer assessment reveals the central role that Saudi Arabia and Russia are once again playing in both helping oil prices to rally and now to moderate. The immediate falls were obvious and followed the headlines out of St Petersburg Economic Forum in late May from both the Saudi and Russian oil ministers and the follow up Gulf oil producers meeting in Kuwait.

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It was made clear that adjustments to the 2016 oil output cuts, amounting to as much as 1 million bpd of additional crude supply, are under “active” discussion ahead of the June “OPEC Plus” meeting in Vienna.

The expectations of the outcome of the June meeting is now even more crucial and some are expecting the June 22 OPEC/non-OPEC meeting to formally keep the 2016 oil output cuts in place, as Riyadh sees this hard-won Vienna framework as key to putting in a market floor by making future action on supply restraint more credible and quicker to decide and implement.

However, the new scenario is that there will be “flexibility” in the quotas by driving overall compliance down from the current 150% level closer to 100% with a lagged new output largely coming from Saudi Arabia and Russia, with additional barrels from Kuwait and the UAE, through the second half of this year.

However, oil prices are likely to remain volatile in coming weeks, with geopolitical crosscurrents driving headline risk. A bearish supply of extra crude seems likely, and there are questions over just how much in oil exports Iran will lose under the US sanctions.

As always, Saudi Arabia is key to the OPEC/non-OPEC negotiations and to ensuring a reasonable degree of stability in oil prices

Dr. Mohamed Ramady

Output declines

There will be a built-in lagged response in raising actual output this year and there remains a risk of deeper output declines in Venezuela and Libya despite talk of new Libyan elections. Spare capacity will also thin considerably with new output using up most of OPEC’s spare capacity, leaving limited options in response to new supply disruptions.

As always, Saudi Arabia is key to the OPEC/non-OPEC negotiations and to ensuring a reasonable degree of stability in oil prices -- and if things work out, perhaps a gentle rise from current levels. To make this successful, Riyadh is as dependent as ever on a helping hand from Moscow as the OPEC plus agreement has been successful so far because of the new found energy strategic partnership between Saudi Arabia and Russia.

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At the same time, however, oil producers are anxiously seeking to pre-empt further, more public pressure from the Trump White House to bring oil prices down with the famous Trump tweet about “unfair OPEC prices” and the US media has been highlighting the higher gasoline prices and how it is likely to fully or partially offset the intended gains to spending and demand in the tax cuts putting the Republicans on the defensive in the upcoming US Congressional elections.

The Saudi case is to argue the value in keeping the hard-won Vienna framework in place as a useful mechanism to put a floor under a future oil price decline, but at the same time, to allow the extra output to soften the hard edge of any further “excessive” oil price increases.

The means to do so is to maintain the Vienna framework but allowing additional output through the mechanism of seeking to lower the overall compliance of the participating member oil producers. That will primarily translate into higher output from Russia, which was essentially coming anyway, some from Kuwait and the UAE, but most of the additional supply coming from Saudi Arabia.

Controlled supply

An easing of the cuts would meet the political needs to respond to US political pressures. This will be done with the OPEC plus Joint Technical Committee monitoring the output and compliance levels, with the aim that there will be a lagged, more gradual and hopefully more controlled new supply of crude brought to the market.

And what about the Russians? For Russia, the process may prove to be relatively straightforward, and in any case, puts it into a position of maximum leverage. Moscow itself has never been as wedded to the Vienna framework as Riyadh, even if the revenue windfall was prized, as is the promised Saudi investments in the Russian energy sector or the benefits of working with the Saudis, which consolidated Russia’s emergence in the Mideast as a key power broker.

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Russia’s help may also be needed if Iran decides to respond to its impending isolation by trying to block the Saudi proposals within OPEC. Moscow has also been positioning to tie additional crude to temper oil price increases to the fate of the US withdrawal from JCPOA and the sanctions that could limit Iranian oil exports.

With so many imponderables, the oil market is in for a bumpy ride over the next few months with the next critical dates being after November when the market will assess how many barrels of Iranian oil are really lost after the sanctions start to bite. For the time being Riyadh and Moscow are doing their best to ease oil price rise concerns.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘OPEC in a Post Shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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