The bulls seem to have slowed, with peaking oil prices sagging somewhat in recent days as rumors swirl that Russia and Saudi Arabia are floating a deal to increase output. In December, the Organization of the Petroleum Exporting Countries (OPEC) and major non-OPEC oil producers had agreed to extend production cuts through 2018 but geopolitics in recent months have led to a spike in prices and the temptation to ease cuts.
In May, the price for Brent crude, the international benchmark for oil, touched $80 per barrel for the first time since 2014. Prices have slid down again — to $75 per barrel on Monday — as discussions heat up ahead of OPEC’s meeting on June 22.
The rally in oil prices has its roots, analysts say, in U.S. President Donald Trump’s decision to back out of the Joint Comprehensive Plan of Action (JCPOA), more colloquially referred to as the Iran nuclear deal, and the reimposition of sanctions. The expectation that Iran’s oil will once again be off the market combined with continuing shortfalls in Venezuela have OPEC considering raising production earlier than expected.
It’s worth noting, however, that Iran’s top oil customer, India, says it won’t follow along with U.S. sanctions on the country. On May 28, Indian Foreign Minister Sushma Swaraj said it was Indian policy to honor UN sanctions, not unilateral sanctions. This supplies additional uncertainty when it comes to assessing the global oil supply and future of prices.
Platts reported that Gulf ministers were “tight-lipped” after meeting recently to discuss the issue of easing cuts and thereby lowering global oil prices. “Kuwait, Saudi Arabia, and the UAE are among the few OPEC members who could raise output quickly, but the ministers were tight-lipped and would not confirm if they had discussed possible increases to production,” according to Platts.
Another country looking to increase production is Kazakhstan. Kazakh Energy Minister Kanat Bozumbayev said recently that the country is in consultation with OPEC and non-OPEC partners regarding the possible easing of the cut agreement. As we’ve followed here at The Diplomat, Kazakhstan verbally committed to cuts but has continued to forge ahead with ramping up production, especially at Kashagan, which came online for the second time in 2016 (after an abortive start-up in 2013). Officials from Italy’s Eni, one of the field’s partners, said recently that production at Kashagan could grow from the current level of 330,000 barrels per day (b/d) to 500,000 b/d.
Not all of the OPEC and non-OPEC oil majors are leaning toward easing cuts just yet. The Wall Street Journal reported that OPEC members Iran and Kuwait have argued that Saudi Arabia, in pushing to ease cuts, is capitulating to Russian and U.S. pressure to lower global oil prices by increasing supply.
In an article for Oilprices.net, Tsvetana Paraskova pointed out that “those who suggested easing the cuts—Saudi Arabia and Russia—have the spare capacity to raise production, while many of the others don’t.”
Bob McNally, founder of consultant Rapidan Energy Group LLC in Washington and a former White House oil official, told Bloomberg via email that “If Saudi Arabia and Russia want to increase production they will, and if Venezuela, Iran or others object, then the communique’s language will be vague or silent on the prospective output boost.” Essentially, it doesn’t matter what OPEC officially decides, it matters what Saudi Arabia and Russia do.
For Kazakhstan, its noncompliance with the production cut deal has been swept under the rug by the other producers. From January 2017 to April 2018, Astana’s average compliance with the cut agreement was a whooping -308 percent. Overall, however, the OPEC and 10 non-OPEC oil majors have a compliance rate of 117 percent and 83 percent, respectively. Kazakhstan’s noncompliance has been balanced by extreme overcompliance (involuntary, Bloomberg writes) in Venezuela (267 percent) and Angola (172 percent), in particular.
Should Saudi Arabia and Russia lead the group of oil producing states into easing cuts later this month, the likely outcome will be a harnessing of to-date growing oil prices. Unpredictable as markets can be, only time will tell if the group is calling off the cuts too early.