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Opec: the market’s new talking shop

The cartel won’t be cutting at June’s Vienna meeting. It will be trying to salvage some unity

RARELY at any other time in Opec’s history has its implicit mission – to prop up prices through collective supply restraint – been more necessary. Seldom has it been less united or more unwilling to cooperate.

Igor Sechin sounded Opec’s death knell at the beginning of May, proclaiming that the group had “practically stopped existing as a united organisation”.

Until recently Russia was willing to co-operate with the group as part of a coordinated production freeze. But the failure of the Doha meeting signaled that even an agreement to maintain output – at already record highs – was out of reach.

The next Opec meeting, due to be held in Vienna on 2 June, isn’t likely to succeed where Doha failed. The ministers might even spend more time debating a successor to Abdalla El-Badri, Opec’s long-serving secretary general, whose time is up. Even that technocratic appointment, though, will probably look more like a showdown than a gentleman’s agreement.

What Opec could do is decide to balance the market. That would lift prices and draw some of its members back from financial ruin. But achieving a coordinated agreement to freeze, let alone cut output, isn’t looking likely when Saudi Arabia and Iran – rivals in oil and everything else – are both intent on maximising their market share.

Opec might be better off doing what it often does: nothing. The market is already showing signs of tightening

In April, Opec crude output soared to a seven-year high of 32.76m barrels a day, according to the International Energy Agency (IEA). Saudi Arabia may have appointed a new oil minister and vowed to wean its economy off crude, but it hasn’t shown any signs of reducing its output, which has remained above 10m b/d since February 2015. It will probably go higher again this summer.

Iran is doing all it can to increase production and exports to pre-sanctions levels – hoping to do this before Opec’s ministers turn up in Vienna. Such a swift recovery would consign the freeze deal to the dustbin – if it’s not already there, because all it would do is cement producer output at the maximum level anyway. The Islamic Republic won’t be able to boost production further without significant upstream investment.

All and nothing

Opec might be better off doing what it often does: nothing. The market is already showing signs of tightening. All along, the plan was to let non-Opec – the “inefficient” producers, in former Saudi oil minister Ali al-Naimi’s words – do the balancing.

That seems at last to be happening. In April, global oil production increased by just 50,000 b/d, compared with a 3.5m b/d rise at the same time last year. All told, non-Opec production is expected to fall by 0.8m b/d this year, to 56.8m b/d.

Other unplanned supply outages are starting to mount. About 3m b/d of production is offline thanks to geopolitics and other supply-side problems.

Analysts from investment bank Goldman Sachs say this is helping the market flip to a deficit – meaning demand exceeded output – three months earlier than they expected.

Demand-growth prospects have also started to pick up. Consumers might burn 1.4m b/d more this year than last, thinks Goldman Sachs. That’s a faster pace than the IEA’s forecast, which sees demand reaching 95.9m b/d, or growth of 1.2m b/d. (The agency might end up revising that number – it has already increased its estimate of how much the world consumed in the first quarter of 2016.)

Non-OECD countries are driving this growth – consuming 1.6m b/d in the first quarter compared with last year – with notably strong gains in India, China and Russia in the first quarter.

If Opec didn’t cut when the market was sinking, it won’t do so now, when it looks like the fundamentals are turning

Crude-stock building in rich nations is also beginning to slow. In the first quarter, stocks rose at their slowest rate since the end of 2014. 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. This confirms “the direction of travel of the oil market towards balance”, says the agency.

All this makes any hope of Opec giving the market another shove rather forlorn. If it didn’t cut when the market was sinking, it won’t do so now, when it looks like the fundamentals are turning. “It just isn’t quite as pressing,” says Julius Walker, an analyst at JBC Energy, a market-research firm.

The danger is that the latest rally fizzles. Even bulls don’t see a return to triple-digit oil prices, and many caution that a surge past $50 a barrel will just bring more oil back on stream.

Opec, though, will remain passive as these theories unfold, unable to act without unity, and unwilling to unite. Already, Kuwait’s oil minister has stressed that June’s meeting should focus on dialogue between members rather than any action to influence prices. Given some of the rivalries now playing out, even that might be a task beyond the group.

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