As OPEC ministers, oil company executives, and myriad market watchers gather in Vienna for the 174th OPEC meeting on June 22 Stratas Advisors presents a quick guide to the meeting and some possible outcomes.

UPDATE - OPEC Reaches Deal For Modest Oil Output Increase

While the risk is rising that the production agreement is essentially dissolved, Stratas Advisors continues to expect that the deal will remain officially in place, but that we will see OPEC and non-OPEC volumes (both produced and exported) rising through the end of the year regardless of that fact.

Saudi Arabia and Russia have both been lobbying for a change to the production deal, with some proposals rumored to encourage production be lifted by 1.5 million bbl/d. However, the two countries appear to be running into unanticipated resistance from historical allies.

Saudi Arabia has led the push within OPEC to officially raise the group’s production level, but while there has been vocal opposition from Iraq, Iran and Venezuela few nations besides Saudi Arabia have come out in favor of the increase, including longtime Saudi Arabia allies Kuwait and the United Arab Emirates. Iran has been especially critical of lifting the production caps as it faces U.S. sanctions in November which are already making its oil more difficult to sell.

One workaround, if OPEC were unable to agree to raise production as a group, would be for Saudi Arabia to stop over-complying with the deal. By cutting its own production more than necessary per the terms of the deal Saudi Arabia has room to raise production without being in violation of the deal.

According to the International Energy Agency, Saudi Arabia’s compliance has averaged 120% since the deal was enacted. This was cut sharply between April and May after Saudi Arabia raised production and exports but still came in around 108%. Such a move would be in line with Stratas Advisors expectations that OPEC production will gradually rise through the end of the year without an official change to the agreement.

Currently, crude oil prices likely have at least a 1 million bbl/d production increase essentially “baked-in.” This means that if Saudi Arabia manages to corral OPEC into agreeing on June 22, and receives similar support at the June 23 meeting with the non-OPEC signatories, we’ll likely see a muted market reaction.

Prices could weaken slightly as fears of undersupply are eased. However, if OPEC fails to come to a definitive agreement and Saudi Arabia does not outline unilateral steps it will take to increase production, prices could spike on fears of a deficit for the next six months.

Ashley Petersen can be reached at apetersen@stratasadvisors.com.

Comments