• 4 minutes Your idea of oil/gas prices next ten years
  • 7 minutes WTI Heading for $60
  • 13 minutes Could EVs Become Cheaper than ICE Cars by 2023?
  • 3 hours Pros and Cons of Coal
  • 3 hours Why does US never need to have an oil production cut?
  • 3 hours US continues imports of Russian gas which it insists Europe should stop buying
  • 28 mins Oil Prices
  • 3 days Germany Discusses Lifting Ban on Deporting Syrians
  • 3 hours French Fuel Protests
  • 24 hours Regular Gas dropped to $2.21 per gallon today
  • 18 hours Warren Buffett
  • 22 hours Is California becoming a National Security Risk to the U.S.?
  • 14 hours And Just Like That, Everybody Stopped Talking About $100 Oil
  • 2 days Trump administration slaps sanctions on Saudis over Khashoggi's death
  • 2 days Pence says South China Sea Doesn't Belong To Any One Nation
  • 2 days Commission: U.S. Could Lose Wars With Russia, China
Alt Text

Saudis Study Potential OPEC Collapse

Saudi Arabia is studying the…

Alt Text

Venezuela’s Glaring Gasoline Crisis

Venezuela is replete with operational…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Trending Discussions

3 Possible Outcomes From The OPEC Meeting

The OPEC meeting is a week away and based on the signals from the group’s top producers, the market is assuming that the group will increase oil production. However, the exact amount is still unknown, and the fallout from the lack of consensus could play out in several ways.

It has been a few years since the degree of uncertainty heading into an OPEC meeting was this high, and even longer since the discord from within the group was so pronounced. The infighting could lead to some unexpected outcomes. Here are several possible scenarios to consider as the meeting approaches.

Scenario #1: OPEC+ agrees to moderate production increases, somewhere on the order of 500,000 to 800,000 bpd. The middle-of-the-road scenario seems to be what the market is pricing in. Russia has reportedly pushed for more aggressive production increases. Early reporting from a few weeks ago indicated that Russia was leaning towards hiking the group’s output by about 1 million barrels per day (mb/d). Bloomberg reported more recently that Russia may propose an increase of 1.8 mb/d, essentially wiping out the entirety of what the OPEC/non-OPEC coalition agreed to in late 2016, though to be sure, some countries – Angola, Mexico and Venezuela, for instance – would not be able to return to their old production levels.

Saudi Arabia has pressed for something more modest. The number floating around late last month that Riyadh preferred seemed to be around 300,000 bpd. Since then, Venezuela’s outlook has darkened, so there could be a willingness to go higher.

Related: The Bullish And Bearish Case For Oil

If Saudi Arabia and Russia split the difference and opted for an increase of somewhere between 500,000 and 800,000 bpd, they could immediately offset most of the declines from Venezuela over the past year. That increase would in no way flood the market though, particularly with surplus inventories already having been eliminated. The oil market has priced in an assumed increase in output, and this level of increase would probably match expectations. The result, then, would conceivably lead to no major change in oil prices.

Scenario #2: Saudi Arabia and Russia agree to more aggressive increases of 1 mb/d or more. Oil prices crashed last month when it was first reported that the OPEC+ group was considering production increases, but many oil analysts agree that more output is needed given the outages from Venezuela and potentially from Iran, plus strong demand growth. That logic lends some weight to Russia’s insistence on larger production increases, and if Riyadh and Moscow opt against modest increases (Scenario #1), they will more likely err on the side of higher output rather than something more minimal.

That means the possibility of an increase of 1 mb/d or more. The details still need to be worked out but Saudi Arabia is reportedly considering a two-step phase in, which would help smooth out the impact on the oil market. In practice, that could mean an increase of 500,000 bpd immediately, plus another 500,000 bpd in the fourth quarter. Such a plan might require calling an extraordinary meeting in September, Bloomberg reports.

This scenario would likely have a bearish impact on the market, especially if the two producers agree to something larger than 1 mb/d. To be sure, however, there are pitfalls to this strategy. Adding more than 1 mb/d to the oil market could keep prices subdued for a while, but it would run down spare capacity to historically low levels. As the new supply is soaked up over the next year or so, low spare capacity would add a lot of upside risk to the market. However, from Saudi Arabia and Russia’s point of view, that is a problem for another day.

Scenario #3: Saudi Arabia and Russia can’t agree, unilaterally increase only modestly. Much of OPEC is dead set against any production increase, largely because a lot of countries have no ability to ratchet up output on short notice. Venezuelan output has been in a death spiral for the last six months or so. Iran, under U.S. sanctions, could struggle to keep exports from falling. Angola and Mexico have fields in decline. Aside from Russia and Saudi Arabia, perhaps only Kuwait, the UAE and Iraq have the ability to add anything of significance, and Iraq has voiced opposition to higher output.

Related: Saudi Arabia: Deal To Gradually Ease Cuts Is ‘Inevitable’

These are the ingredients for a problematic and contentious meeting, to say the least. OPEC operates on consensus, and the production limits have always depended on voluntary compliance. If they fail to agree, as seems entirely plausible, the end result could be some informal understanding by the group’s largest producers, including Saudi Arabia and some of the Gulf States, along with non-OPEC member Russia, to increase output. Riyadh does not need the permission of the rest of the group to increase production, but the Saudis have placed a premium on OPEC’s cohesion.

Without a formal agreement, Saudi Arabia may hold back a bit, if only to not anger the rest of OPEC too much. And because the Saudis represent the largest slice of capacity that can be turned on or off, a more restrained approach would translate into more modest production gains overall.

There is a high degree of uncertainty over how this plays out, but if collective output only rises by 500,000 bpd or less, for example, it would represent a very bullish outcome. Because oil markets are already baking in higher volumes, prices could rise if the result is only a modest increase. To be sure, based on more recent signals from Riyadh, demonstrating a willingness to go higher, this scenario seems the least likely.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment
  • Parisa on June 15 2018 said:
    So based on all these scenarios, oil is bearish ( scenario number 3 likely wont happen as you mentioned too). In your May article, you said dont bet against oil which is opposite of what you said here. Maybe you should have another article to go short oil or probably GS is short oil and this is why you guys told the retail to be long!
  • Mamdouh G Salameh on June 16 2018 said:
    This is an excellent piece of analysis, Mr Cunningham.

    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 into a permanent mechanism capable of responding quickly to a tightening in the global oil market or a return of the glut.

    With prices hovering around $74 a barrel, I would have urged for the coming OPEC meeting not to raise production until they have irrefutable material evidence that the glut in the global oil market has been eliminated completely and oil prices surge beyond $80 a barrel.

    However, President Trump has asked Saudi Arabia to ramp up oil production to replace any shortfall in Iranian oil exports as a result of the forthcoming US sanctions. 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.

    History is replete of examples of Saudi appeasement of the United States by quenching its addiction to oil, financing its wars and doing the United States’ bidding. Now the Saudi are so keen in joining the US-Israel- axis against Iran.

    On balance, I think Saudi Arabia will carry the day in the OPEC meeting and argue for scenario one, namely persuading OPEC to accept a production rise of 500,000-800,000 barrels a day (b/d). In pursuing such a course of action, Saudi Arabia will achieve many goals, namely, reassert its control of OPEC, meet President Trump’s request halfway, keep the bulk of its spare production capacity (if it actually exists) virtually intact, allow the oil price to resume its upward surge and also meet Russia’s enthusiasm for a higher production rise halfway. Saudi Arabia is mindful of the fact that the Russian economy can now live with an oil price of $40 or less while it needs an oil price far above $80 to balance its budget.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • citymoments on June 17 2018 said:
    With all due respects to the author, I would like to present a most likely outcome of this upcoming OPEC meeting next week for his consideration: it is called nothing. The oil market, whether tight or loose, will not change a thing regardless any decision which will be made at next OPEC meeting.The reason is very simple - the global oil production can be only altered by the medium and long term capital investments in E&P. If the oil market is already under supplied and investments in E&P sector has already been very short last a few years, any OPEC decision will not be able to do anything to suddenly create more capital investments in oil production; also we must understand, in oil E&P business, there is a huge time lag between the deployment of capital and the beginning of new production. That is why the oil price is highly volatile but the price of fresh water is always stable. Of course, the OPEC decision will cause some changes in short term market perceptions, though will have no impact whatsoever to alter the current status of oil market.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
-->