In the latest signal that the upcoming OPEC+ meeting in Vienna could end in disaster, Iran’s OPEC representative said the country will veto any proposal for a production increase with the support of Venezuela and Iraq.
Saudi Arabia and Russia will propose an increase in production beginning from July 1, with the range of the suggested increase at between 500,000 bpd and 1.5 million bpd. However, “Three OPEC founders are going to stop it,” Hossein Kazempour Ardebili told Bloomberg, adding “If the Kingdom of Saudi Arabia and Russia want to increase production, this requires unanimity. If the two want to act alone, that’s a breach of the cooperation agreement.”
The warning comes on the heels of an announcement by Russia’s Alexander Novak that Moscow and Riyadh had agreed to make their oil market partnership permanent, with a clause in their bilateral agreement stipulating that they could intervene to raise or lower production as they see fit.
Yet it is easier for Saudi Arabia and Russia to start pumping more since they are now producing below capacity. Venezuela, however, is already struggling with an inexorable decline in its oil production, which to a significant extent drove the overcompliance of the OPEC+ bloc with the agreed production cuts. Related: Venezuela Forced To Shut Down Production As Operations Fall Apart
Iran will also find it difficult to increase production, especially in the face of renewed U.S. sanctions. Iraq, for its part, is eager to expand its production capacity but it will take time to do so.
So, right now these three OPEC members are at a clear disadvantage to those capable of quickly restoring pre-agreement production levels. Since any decision by OPEC needs to be unanimous, and the chances of that happening are slim, what we are increasingly likely to see on Friday is what Ardebili referred to as “a breach of the cooperation agreement.”
By Irina Slav for Oilprice.com
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Saudi Arabia and Russia seem to give themselves the extraordinary power to breach the OPEC/non-OPEC production cut agreement at well by intervening to raise or lower production as they see fit thus ignoring OPEC completely
While there is still a strong need for the OPEC/non-OPEC production cut agreement to ensure that the global oil market is fully re-balanced, I have always called for the OPEC deal to be metamorphosed at a future date into a permanent mechanism capable of responding quickly to a tightening in the global oil market or a return of the glut.
Saudi Arabia and Russia have different motives for wanting to raise oil production. Saudi Arabia is responding to a request by President Trump to ramp up oil production to replace any shortfall in Iranian oil exports as a result of the forthcoming US sanctions. The Saudis are also signalling that they are keen to be part of the US-Israeli axis against Iran. For Saudi Arabia, it is a case of when the United States says to the Saudis jump, their reply is not why but how high even at the risk of damaging their own economy.
Russia’s motivation is different. Russia’s oil is produced by private Russian oil companies with small government stakes. They aim to maximize their production having invested heavily in expanding their production capacity. Furthermore, Russia’s economy can live with an oil price of $40 a barrel or less. By contrast, Saudi Arabia needs an oil price higher than $80 to balance its budget.
Iran’s veto is meaningless since Saudi Arabia as the de facto leader of OPEC can ignore Iran’s veto and carry the day with support from its allies inside OPEC. That means that Saudi Arabia will persuade OPEC to accept a production rise of 300,000 - 600,000 barrels a day (b/d). Still, if OPEC votes against any increase in production, Saudi Arabia will still go it alone supported by Russia particularly that Iran, Venezuela and Iraq can’t at this stage increase production.
However, this will not be without risk for Saudi Arabia. The Saudis claim to have a spare production capacity of up to 2 mbd. Increasing production will cut deeply into their production capacity and eventually lead to higher oil prices should the global oil market tighten at a future date.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London