The upcoming OPEC meeting on June 22 is shaping up to be a contentious one, after news broke that the U.S. government asked Saudi Arabia to increase oil production before Washington pulled out of the Iran nuclear deal.
Earlier last week, news surfaced that the U.S. government asked Saudi Arabia to boost output to relieve pressure on prices. But Reuters followed up with a report on June 7, adding more context to that story. According to Reuters, a high level Trump administration official called Saudi Arabia a day before Trump was set to announce the U.S. withdrawal from the Iran nuclear deal, asking for more oil supply to cover for disruptions from Iran.
The last time the U.S. government pressured OPEC into adding supply, it was also over Iran. The Obama administration wanted the cartel to offset disrupted Iranian production, after an international coalition put stringent sanctions on Iran in 2012. Roughly 1 million barrels per day were knocked offline.
While the Trump administration’s request might irk OPEC members, with Iran obviously the most aggrieved, the apparent willingness of Saudi Arabia to comply with Washington’s request has ignited furor from within the group.
“It’s crazy and astonishing to see instruction coming from Washington to Saudi to act and replace a shortfall of Iran’s export due to their Illegal sanction on Iran and Venezuela,” Iran’s OPEC governor, Hossein Kazempour Ardebili, said in comments to Reuters. He said that OPEC would not simply comply with Washington’s requests. “No one in OPEC will act against two of its founder members,” he said, referring to Iran and Venezuela. “The U.S. tried it last time against Iran, but oil prices got to $140 a barrel.”
“OPEC will not accept such a humiliation. How arrogant and ignorant one could be (to) underestimate the history of 60 years’ cooperation among competitors,” he said.
Venezuela wrote to OPEC members, asking them to denounce U.S. sanctions, a request similar to the one Iran made recently. “I kindly request solidarity and support from our fellow members,” Venezuelan oil minister Manuel Quevedo wrote. The group should discuss “the constraining effects of unilateral sanctions imposed by the United States of America, which represent an extraordinary aggression, financially and economically, for our national oil industry’s operations and the stability of the market.”
The comments suggest that a good portion of the cartel is lining up against any move to increase production. It could set the stage for a heated meeting in Vienna in two weeks’ time. “It might be one of the worst OPEC meetings since 2011," Eugen Weinberg of Commerzbank told CNBC.
Related: Will Saudi Arabia Listen To U.S. Demands For More Oil?
He was referring to the infamous 2011 meeting that fell apart over sharp differences in opinion, with Saudi Arabia wanting to increase production to ease triple-digit oil prices following the conflagration in parts of North Africa and the Middle East during the Arab Spring. But the Saudis were shot down by much of the rest of the group, which opposed lifting output. Former Saudi oil minister Ali al-Naimi said it was “one of the worst meetings we have ever had.”
Although not exactly the same, the differences back then echo those of today. Saudi Arabia, wary of hurting global economic growth and also cautious about not incentivizing too much high-cost supply, wants to add some barrels back onto the market.
Just about every OPEC member outside of the Gulf is unable to increase production anyway, so it is of little surprise that they are opposed to higher production. Venezuela’s output is falling fast. Angola is also losing production. Libya and Nigeria seemed to have hit a temporary ceiling, with security issues always looming as a supply risk. Also, they don’t have official limits on their output as part of the OPEC deal, so there is little upside for them in supporting production increases from other countries.
Iran, obviously, is facing production outages from U.S. sanctions, so it likely can’t increase output even if it wanted to. Officials from Iraq and Algeria made negative comments over the past week about the possibility of higher output.
From the non-OPEC camp, Mexico’s production is falling anyway, so it has little to no ability to respond to change in policy.
Ultimately, the only beneficiaries of higher production would be Saudi Arabia and Russia, and to a lesser extent some of the Gulf States like Kuwait and the UAE.
Related: Oil Kingdom In Crisis: Saudi Royal Family Rift Turns Violent
But, Saudi Arabia and Russia probably can’t simply allot themselves more production allowances without risking a full-blown revolt from the rest of the group. So, they will likely need to allocate more production to everyone, but even the act of deciding on a formula will also be highly contentious. Still, it will be somewhat of a formality for most members since they can’t increase production anyway.
So, there are a few possibilities from the upcoming meeting. First, Saudi Arabia and Russia convince the group to agree to an increase in output, and while everyone nominally is allowed to increase output a bit, the two top producers make up the lion’s share of the increase. That will require sacrifice from much of the group, who won’t be able to increase production and will have to stomach lower oil prices.
Another possibility is a breakdown in negotiations and Saudi Arabia and Russia go their own way, increasing output. Or, talks could breakdown and there is no change in output, although with the upside risk to prices, this seems unlikely.
Whatever the outcome, odds are that the upcoming meeting is the most combative we have seen in a while.
By Nick Cunningham of Oilprice.com
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Still, Iran will not lose a single barrel of its oil exports as a result of US forthcoming sanctions for two reasons. One is that the European Union (EU) has already indicated that it will stay in the Iran nuclear deal and will not comply with US sanctions and will, therefore, continue to import Iranian oil. The second reason is that Iran will be using the petro-yuan for its oil exports to China, the euro for its exports to the EU and barter trade with Turkey, Russia and India virtually neutralizing US sanctions. If, however, the EU which is the biggest economic bloc in the world accounting for 23% of the global economy, succumbs to US sanctions on Iran, then it will lose its credibility and influence worldwide.
Were Saudi Arabia to accede to President Trump’s request, it will be the fourth time that it has obliged the United States at a huge cost to its own economy.
The first time was in the early 1980s when Saudi Arabia at the request of the United States flooded the global oil market with oil in order to undermine the USSR’s economy at the time of the Afghanistan invasion. The oil price went down to less than $10 a barrel causing the Saudi economy to virtually go bankrupt.
The second time was immediately after the Iraq/Iran war with Iraq emerging militarily victorious against Iran but depleted economically. Kuwait and Saudi Arabia probably at the behest of the United States started flooding the global oil market with oil leading to a collapse of oil prices, adding hugely to Iraq’s economic woes and leading eventually to the Iraqi invasion of Kuwait and the first Gulf War in 1990. The rest is history.
The third time was in 2014 when Saudi Arabia and its allies flooded the global oil market with oil against the wish of OPEC in order to undermine Iran’s economy. As a result the oil price collapsed to $26 a barrel inflicting the heaviest damage on the Saudi economy.
This time, Saudi Arabia risks unravelling the OPEC/non-OPEC production cut agreement that has brought an end to the glut in the global oil market and pushed on prices to $80 and also inflicting huge damage again on the Saudi economy which is already bleeding blood and money in the war in Yemen.
On balance, Saudi Arabia under the oil leadership of its astute oil minister Mr Khalid Al-Falih may decide to look after long-term interests and decide not to oblige President Trump's request
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London