Five things to bear in mind about the Opec meeting
Opec will gather in Vienna on 2 June to talk about freezing oil production. Few expect a deal will be made
Most of the group’s members will gather in Vienna on 2 June to talk about freezing oil output. Momentum towards forging a deal is lackluster and internal rivalries show no signs of abating. Here are a few things to bear in mind ahead of the meeting.
1) No one expects Vienna to succeed where Doha failed
Despite the hopes of Middle Eastern member states that a deal can be achieved to shore up prices, few industry observers expect an agreement will be forthcoming in Vienna.
As Derek Brower wrote in April the Doha talks were a failure of epic proportions. Saudi-Iranian rivalry thwarted prospects of a deal being struck, as Riyadh insisted that Tehran must comply with a coordinated freeze.
This signaled that even an agreement to maintain output – at already record highs – was out of reach.
The failure at Doha lead to Igor Sechin sounding Opec’s death knell at the beginning of May, proclaiming that the group had “practically stopped existing as a united organization”.
The chances of talks in Vienna succeeding just six weeks after the Doha debacle are slim.
2) The focus will likely be on Saudi Arabia’s new oil minister
Instead of achieving an output freeze, the focus will likely be on improving the perception of Opec as a unified and functioning organisation and Saudi Arabia’s role in this.
Saudi Arabia is particularly concerned about the market’s perception of its role as Opec’s de facto leader, one source told Petroleum Economist.
Last month Khalid al-Falih (pictured) took over from long-serving Ali al-Naimi, as the Kingdom’s new oil minister. Falih - a former chief executive of Saudi Aramco - will be closely watched throughout the meeting. Any hint of a change in Saudi policy and oil prices will react immediately.
3) - Iran isn’t showing any signs of being prepared to cut output
A day ahead of the meeting Iran’s Opec representative told the country’s state-run news agency that it had no plans to cut output.
"Iran expects fellow Opec members to understand Tehran's status which is trying to bring its market share and production level after years of draconian sanctions to the pre-sanctions levels," Mehdi Asali told state media on 1 June.
The Islamic republic has been very clear about its intentions to ramp up both its oil production and its exports and it is on track to reach pre-sanctions oil export levels this month.
Iran produced 3.4m barrels a day of crude in April, say analysts at JBC Energy, up from 2.99m b/d in January. It has vowed to reach 4m b/d as soon as possible, putting it within 100,000 b/d of its pre-sanctions 2011 level.
4) Production outages have helped to strengthen Brent prices
Crude prices have firmed in recent weeks as a series of unplanned production outages have added support. This reduces the urgency for Opec to cut output.
Front-month Brent futures climbed to a seven-month high of over $50/b at the end of May and have remained in a tight range since.
Wildfires in Alberta took an estimated 1.2m b/d of production offline at the beginning of May while disruptions in northern Iraq, maintenance in the UAE, outages in Venezuela and at Shell’s Forcados terminal in Nigeria have also combined to support prices.
Crude prices have firmed in recent weeks as a series of unplanned production outages have added support. This reduces the urgency for Opec to cut output
Meanwhile Opec unplanned crude oil supply disruptions averaged almost 2.5 million b/d in April, 200,000 b/d higher than in March
If Brent prices remain above $50/b throughout the second half of the year, as many analysts expect they will, Opec’s incentive to cut output will diminish further.
5) Crude stocks are finally drawing
In the first quarter, they rose at their slowest rate since the end of 2014, according to the International Energy Agency. February saw the first stock draw in a year. So while inventories are still rising – by an average of 1.3m b/d in the first half of the year – the IEA now expects them to inflate at just 200,000 b/d in the second half.
Energy Aspects – a consultancy – cut its estimates for global crude stock builds for Q2 this year, to just 100,000 b/d, compared to a year earlier. That’s down from the firm’s earlier estimate of a 0.8m b/d build in the quarter.
If this continues, the oil market will balance much quicker than expected, further diminishing any incentive for Opec to cut output.