OPEC faces choices

Energy ministers and other delegates from the Organization of Petroleum Exporting Countries are gathering May 25 in Vienna for a regularly scheduled meeting. But the stakes are far from regular given volatile oil prices.
May 23, 2017
3 min read

Energy ministers and other delegates from the Organization of Petroleum Exporting Countries are gathering May 25 in Vienna for a regularly scheduled meeting. But the stakes are far from regular given volatile oil prices.

OPEC and some major non-OPEC producers have largely complied with production-cut targets implemented at the start of the year. OPEC agreed to reduce production by 1.2 million b/d while non-OPEC productions agreed to cut by 600,000 b/d of which Russia accounted for 300,000 b/d.

Amid much debate regarding OPEC's next move, Saudi Arabia and Russia both support extending the production-cut targets through Mar. 31, 2018. That news rallied oil prices, which earlier this month fell to 5-month lows. Analysts largely blamed rising US oil production for counterbalancing OPEC's efforts.

"The upshot is that the OPEC production agreement has so far merely brought about a shift in market share," said Hans van Cleef, ABN-AMRO senior energy economist. "This confronts OPEC with a devilish dilemma: support the oil price or maintain market share."

Three scenarios

Van Cleef foresees three possible scenarios, which he outlines as follows:

• The agreement extension is the most likely scenario. "The problem is that this scenario has already been priced in," van Cleef said. "In this case, the oil price will not rise much further than $50/bbl in the coming months."

• Another alternative is to drive oil prices higher by surprising the market with a lower-than-expected production ceiling. Van Cleef said, "This option is possible as OPEC can cut output faster than US oil producers can ramp it up."

• A final scenario involves abandoning the production ceiling to prevent any additional shifting of market share. Van Cleef said this scenario seems unlikely. "A cautionary note is in order…this scenario did not seem very likely at the end of 2014 either, but did become reality as OPEC attempted to squeeze US shale oil producers out of the market."

Other analysts comment

Morgan Stanley analyst Martijn Rats expects OPEC will extend the production-target agreement at its upcoming meeting. But in a research note issued earlier this month, Morgan Stanley said it believes the pact is "unlikely" to get extended again at a subsequent OPEC meeting.

Mahesh Radhakrishnan, Frost & Sullivan energy and environment analyst, said, "Oil companies that are vertically integrated will be ideally positioned to optimize their operations as they will have a stable downstream business, which usually profits when oil prices are low."

Regarding producing countries, he noted that countries counting on oil and gas production for more than 80% of gross domestic product face a possible deficit in times of low oil prices.

US industry's drilling technology has cut tight oil production costs, allowing producers to boost production despite low oil prices. Other countries lacking this tight-oil technology need to seek collaborative opportunities, Radhakrishnan said.

Meanwhile, Iranian voters go to the polls this month for a presidential election, which Royal Bank of Canada analysts believe has important implications for the durability of the nuclear deal and sanctions relief that has enabled the return of Iranian oil exports.

President Hassan Rouhani is expected to be reelected. But his opponent, conservative cleric Ibrahim Raisi, likely would support provocative military and regional policies, said RBC's Helima Croft in a May 16 note. She believes such policies already imperil the nuclear agreement.

"A sanctions snap-back could not only deter foreign investment in the Iranian energy sector but could also curtail the country's ability to sell its barrels abroad," she said. "Hence, we continue to contend that Iran is one of the most underappreciated upside oil price risks in the oil market."

About the Author

Paula Dittrick

Senior Staff Writer

Paula Dittrick has covered oil and gas from Houston for more than 20 years. Starting in May 2007, she developed a health, safety, and environment beat for Oil & Gas Journal. Dittrick is familiar with the industry’s financial aspects. She also monitors issues associated with carbon sequestration and renewable energy.

Dittrick joined OGJ in February 2001. Previously, she worked for Dow Jones and United Press International. She began writing about oil and gas as UPI’s West Texas bureau chief during the 1980s. She earned a Bachelor’s of Science degree in journalism from the University of Nebraska in 1974.

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