As we approach the June OPEC meeting, all eyes on Saudi Arabia and Russia for any clues on the direction they will go on 22nd June. With the sanctions on Iran and imminent collapse of Venezuela, Trump has asked the two power weights to step in to avoid oil prices going any higher. This in itself is ironic as the US has been trying to wean itself off imports and attain energy independence from OPEC, yet it is now openly asking Saudi Arabia to help.
In recent days, both Saudi Arabia and Russia have hinted at wanting to increase production by 300mbopd, although the details remain to be thrashed out- i.e. will it be these two countries shouldering the increase or will it be spread amongst the OPEC members. The path this will take and desire to increase production will be dictated by whether consensus can be reached next week.
On the one hand, keeping a lid of oil prices is important for OPEC to avoid a wave of US production coming onstream with producer hedging. On the other hand, a number of OPEC nations urgently require cash flow from higher oil prices to balance precarious budgets.
If consensus can be reached to increase production, the additional barrels can be met by Saudi Arabia and Russia making up the production but will likely be criticised by other OPEC members of using the opportunity to snatch market share. An alternative would be for the members’ quotas to be renegotiated although this will open up another can of worms. In the case of the latter, it is noted that not all members are in a position to raise production (e.g. Venezuela, Nigeria, Libya which are fraught with domestic difficulties). Finally, OPEC members have been in over compliance so there remains running room to utilise the existing quotas, although this will again be shouldered by Saudi Arabia and Russia.
In the medium and longer term, fundamentals point to a supply shortfall so gradually raising production now will keep prices under control although the path ahead will remain choppy.
