OPEC in June

April 20, 2015
For the Organization of Petroleum Exporting Countries and the oil market, a fateful month looms.

For the Organization of Petroleum Exporting Countries and the oil market, a fateful month looms. The exporters' group on June 5 will hold its first regular meeting since asserting the priority of market share last November and leaving defense of the crude price to other producers. By the end of June, a market-crushing supply increase will be in prospect if Iran and the G5+1 countries reach a deal on the Islamic Republic's nuclear program. From two OPEC members especially subject to violent disruption, Iraq and Libya, who knows what supply will be? And Saudi Arabia is raising production.

Does anyone still think OPEC has lost relevance?

Saudi-Iranian conflict

In June, OPEC officials will continue to call for production cuts by nonmembers but also will have to address resurgent supply from Iran if a sanctions-ending nuclear deal seems imminent. While OPEC has made comparable accommodations in the past, this one won't be easy. Saudi Arabia and Iran are in tense, sectarian conflict over regional influence, dangerously beyond traditional disputes over quotas and market shares. In the shadows of Saudi-Iranian antagonism lurk questions about when and at what level a quota will be reinstated for Iraq.

Market data reported this month indicate stubborn oversupply. The International Energy Agency boosted its projection for 2015 oil demand by 90,000 b/d from its March outlook to 93.6 million b/d. While welcome, the demand twitch is overwhelmed by the 1 million b/d by which IEA lifted its outlook for 2015 supply, thanks not only to continuing gains from unconventional resources in North America but also to OPEC itself.

"OPEC crude oil output surged 890,000 b/d to 31.02 million b/d in March-nearly a 2-year high-after Saudi Arabia pushed output towards record levels while Iraq and Libya posted strong supply recoveries," IEA said in its April Oil Market Report. "Early soundings suggest OPEC's lofty March production level-nearly 1.5 million b/d up on the previous year-may hold, if not increase, in April."

Saudi Arabian crude supply increased in March by 390,000 b/d from the prior month to 10.1 million b/d. Much of an estimated 600,000 b/d increase in Saudi exports went to Asia, a market of zooming importance to OPEC producers as output rises in the US and Canada. IEA also notes that Iranian exports increased by 115,000 b/d in March to 1.27 million b/d, technically above the level allowed by sanctions and the highest rate since February 2014. The agency's reason: "heavy buying by China."

Saudi Arabia is claiming its share of the Asian market in anticipation of increased supply from a sanction-free Iran. The consequent softening of crude prices weakens the Sunni kingdom's Shia adversary, Iran's Moscow-based partner in gulf adventurism with its own ambitions for Chinese sales, and Islamic State jihadists in Syria and Iraq.

How much oil Iran can produce if sanctions are lifted? IEA and the US Energy Information Administration both believe Iran has 30 million bbl of crude in floating storage, which could be tapped quickly but at uncertain rates. IEA estimates Iranian production sagged to 2.8 million b/d in March but "in theory" could climb to 3.4-3.6 million b/d "within months of sanctions being lifted." EIA holds a similar view, saying Iran technically can lift crude output by at least 700,000 b/d by the end of 2016. Of that, 100,000 b/d would be new capacity.

Wild cards

Iraq and Libya remain wild cards. Iraqi production, including Kurdish output, increased by 350,000 b/d to 3.67 million b/d in March as weather allowed steady tanker loadings. Further increases are possible via increased flow through the northern export pipeline to the Mediterranean via Turkey. In Libya, March production reached 480,000 b/d, up 125,000 b/d from the February level, and climbed to 600,000 early this month, according to IEA. But Iraqi and Libyan supplies remain vulnerable to militancy.

Yes, June will be interesting. Even more so is all that might change between now and then.