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Trump's spectre looms over tense Opec meeting

Russia and Saudi Arabia plan to raise supply. The move will please the US but make for a rocky summit this week

The Opec+ deal is all but done. A new version may be crafted here in Vienna over the next few days, but the cuts that began at the start of January 2017 and wiped out the global stock excess have run their course. Any new agreement will be designed to preserve a semblance of unity.

But more oil is coming—that's been clear since Russia's Vladimir Putin said the oil-price rally had gone too far . Saudi Arabia has reluctantly accepted this. The only questions are how much Opec+ will add and when; whether it will be done officially or on the quiet; and whether it will be enough to compensate for mounting losses elsewhere, or to satisfy Donald Trump. His shadow will hang over the 22 June meeting.

Opec unity is always easier when the task is cutting supply to support prices. Fissures appear as policy reverses. These days the geopolitical rivalries are also deepening. Opec's standard response is that the group has survived wars between its countries before. And secretary-general Mohammad Barkindo has been a supreme diplomat in the post. But outsiders—not least the sanctions-happy White House—are altering the group dynamic. The atmosphere around the horseshoe table on Helferstorferstrasse will be frosty.

The splits have gone public in the run-up. Russia's producers are itching to start pumping more and energy minister Alexander Novak wants Opec to agree a hike of 1.5m barrels a day—enough , it hopes, to staunch some US supply growth and outweigh the involuntary losses from Venezuela, Angola, and Mexico. Between them, they have cut almost 1m b/d more than their quotas called for.

Saudi Arabia, newly conscious of consumer "anxiety"—a word much repeated by energy minister Khalid al-Falih lately—and wishing to keep Russia in the tent, argues for a smaller increase. In meetings with other Gulf Opec producers, the Saudis have discussed a lift of around 500,000. Yet none of them, including Riyadh, is keen. At $75/b, oil still isn't where the kingdom wants it. Until recently it was telling consumers they could stomach more price appreciation.

'Opec at it again'

That was before Trump started running interference. First came his April tweet castigating Opec for high oil prices. At least as effective, it seems, have been private pleas for more oil from the US government . (Trump followed up on Twitter again on 13 June .)

It's the US intervention that will make things so testy. Russia's exit from the cuts at this meeting has been on the cards since last November (at least for readers of Petroleum Economist). But Opec wasn't prepared for Trump's international wrecking ball to come swinging towards Vienna.

Two member states, Iran and Venezuela, are now under US sanctions. Both countries have written to the Opec secretariat demanding that this be discussed in the meeting. That was declined. So when Riyadh asks them to back its plan to raise oil supply as the White House wishes you can predict the answer.

The perception that Saudi Arabia is dancing to Trump's tune in the oil market is hard enough for Tehran to swallow. That the increase in supply will come at the expense of Venezuelan and Iranian barrels is humiliating. US interventions with Opec aren't new, but this one is toxic for the group's politics. Some Opec watchers wonder quietly if Iran might suspend its group membership.

Other cutters will also resist a move to lift supply. Of the non-Gulf Opec members, only Iraq could quickly raise output. The rest have little if anything to gain—but they will feel the impact of any price fall. Mohammad bin Hamad al-Rumhy, non-Opec Oman's oil minister, is said to be furious at the prospect. Even Saudi Arabia's fellow Gulf producers, which would be able to lift output, are sceptical of the plan to hike. 

Constructive ambiguity

Squaring the needs of an array of geopolitical foes will be tricky. The safest bet is for a fudge that tries to preserve a semblance of unity. This will look like a rollover of the existing deal, and so won't need the unanimous vote a genuinely new agreement would require. It might talk of compliance reaching 100% over the coming months. But given compliance was 158% in May, this would mean more oil.

"Sending a strong and clear signal may not always be the best option for Opec," writes Bassam Fattouh, an expert on Saudi oil policy, in a paper published just ahead of the meeting. He thinks some "constructive ambiguity" might be in order on 22 July.

Still, the pretence would be short-lived. The cutting would be left to the countries that are losing supply anyway. For example, by end-2018, Venezuela might on its own account for almost the entire 1.18m b/d that Opec originally pledged to remove. Its output was just 1.36m b/d in May, 700,000 b/d less than when the cuts started. Analysts say output could drop beneath 1m b/d by year end.

And whatever the group decides, other events now threaten to overwhelm its market management anyway. Opec is still certain that demand will be buoyant this year and next. But the spectre of trade wars now slants the macroeconomic risks to the downside. If the bearish case takes hold, the world may start to need less oil from Opec just as it re-opens the taps.

On the other hand, more production from Opec's Gulf members will leave the group's spare capacity looking increasingly threadbare. It stood at just 1.9m b/d in Q2 2018, according to the Energy Information Administration . Another 500,000 b/d from the Gulf countries would cut it by more than a quarter.

Yet the threats of supply disruptions are building. In Libya alone, 400,000 b/d has been shut in following more violence in the oil crescent . Soon, as sanctions start to cut Iran's supply, the market will look at the global emergency oil-supply buffer and conclude it is perilously shallow. The tempests in the room in Vienna on 22 July may just be the start of another period of oil-price volatility.

Petroleum Economist will be covering the events from the meeting in Vienna throughout the course of this week

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