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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.

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OPEC Edges Closer To Production Agreement

The odds of an orderly agreement in Vienna significantly increased over the last day or so as Iran appeared to soften its hard line, voicing some openness to a modest increase in production from the OPEC+ group.

Saudi oil minister Khalid al-Falih said that the oil market needs more supply because of rising demand and because of the significant outages in several countries.

“The market needs more oil than is currently being produced by these 24 countries,” al-Falih told reporters in Vienna. "Ultimately, we will meet the needs of the market. Consumers are asking for more supply in the second half."

But he went on to add that any increase should be done cooperatively with the whole group’s blessing. “We have to be sensitive to all member countries and listen to their desires,” he said. “Some have said, 'We can't produce and don't increase our production limit,' so I think we just have to wait and listen and come up with a decision that satisfies all stakeholders.”

That conciliatory tone will likely soothe some of the tensions with some of OPEC’s other major producers that have been vociferously opposed to any increase in output, namely, Iran, Iraq and Venezuela.

As of May, the group produced about 840,000 bpd below its targeted level, according to S&P Global Platts, which would seem give them a lot of room to allocate output increases to simply get back to 100 percent compliance.

The presumed solution up until now has been for Saudi Arabia and Russia to simply ratchet up their output, since many other member countries have no ability to do so. But al-Falih acknowledged the pitfalls of charging ahead without the group’s approval. “Reallocating [allocations] to other countries like Saudi Arabia may be a technical solution, but it may not be politically agreeable to others,” he said. Related: Shale CEO: U.S. To Be The World’s Top Oil Producer By Fall

The cooperative tone, no doubt combined with some behind-the-scenes negotiating, appears to be working. Iran has significantly dialed down its opposition. Earlier this week, Iranian officials said they would veto any move to increase output. “OPEC is not an organisation to receive its instruction from President Trump,” Iranian oil minister Bijan Zanganeh said when he arrived in Vienna, referring to reports that the U.S. government pressed Saudi Arabia to increase output to offset expected declines from Iran.

“The US president has blamed OPEC for the price hike,” Zanganeh said on Wednesday. “Indeed, the real responsibility for the current oil price hike lies with the US president himself.”

But several days of talking seems to be building good will. “We are making good progress,” said United Arab Emirates Energy Minister, and current OPEC president, Suhail Al Mazrouei. “This is a very good meeting. We are optimistic.”

Iran’s oil minister also softened his tone, saying that he was optimistic the group could reach a compromise. He signaled support for bringing compliance back to 100 percent.

Still, the details matter, and there isn’t an obvious solution. The Saudis recognize that unilaterally pushing forward with production increases could lead to a breakdown in OPEC’s cohesion, but allocating production increases across the group, to members who have no ability to increase, might not lead to actual increases in supply.

Bloomberg reports that the Saudis are offering a convoluted proposal that would apportion around 1 mb/d of supply increases to various members, but because many won’t be able to ratchet up output, the real supply boost might only amount to about 600,000 bpd.

That echoes other reporting. Reuters hears that the group is considering a 1-mb/d increase, of which the Saudis would add between 0.25 and 0.3 mb/d. After factoring in a few hundred thousand barrels per day from Russia, plus more minor additions from elsewhere, you get to around 600,000 bpd of actual increases.

If a consensus can be reached, the Saudis will have then achieved about as much as they possibly could: They will have threaded the needle by adding more supply to the market, adding enough to keep Russia happy, but not adding so much that the oil price collapses or so much that the rest of OPEC revolts. Indeed, the addition of 600,000 bpd would merely offset the extra declines from Venezuela; it would not flood the market. Related: U.S. Overtakes Saudi Arabia In Recoverable Oil Reserves

In fact, Citi’s Ed Morse says that a roughly 0.5 mb/d increase in supply would actually lead to a $5-per-barrel increase because it would be less than what the market needs.

To get Iran and Venezuela on board with the plan, there is one more carrot the Saudis could offer. Iran and Venezuela might not be able to ramp up production, but they are both pressing for an official statement of some sort from OPEC condemning U.S. sanctions and American interference.

There is a bargain to be had – OPEC could agree to increase production, a large portion of which would be met by Saudi Arabia, but the group could also offer the sanctioned members some official statement in the communique at the end of the meeting, defending their sovereignty. It isn’t clear that Saudi Arabia, a close Trump ally, would go that far, but it would go a long way to smoothing over the tension in Vienna.

By Nick Cunningham of Oilprice.com

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  • citymoments on June 22 2018 said:
    With all due respects to the author, I just like to add four points as follows: 1. I bet most so called experts and analysts never have visited an oil field, never studied science and engineering, never studied geology, never bother to understand the difference between heavy oil and light oil...with so little actual knowledge and so much ignorance derived by their glorious but useless bachelor degree of arts and economics, no wonder they all regard oil as water and OPEC as the tap to turn on or turn off if we need more oil. That is why they make so much noise about the upcoming decision OPEC is going to make this weekend. Those of us, been long enough in this business, all know that producing oil is vastly different from producing water, it is extremely capital intensive and there is a huge time lag between deployment of capital and the actual new production coming online. It is just so absurd to think, world oil production scale is totally at the will of OPEC or any of its member. 2. The very reason Saudis are so keen to IPO their money tree Aramco is because they could not fund further development of their aging oil field by their existing operating cash flow when oil price is at $73. With all due respects to all those middle east oil producing nations, we must all keep in mind, oil revenue is the only source of income for those countries. Just go shopping and tell me which good is made by that region. 3. Shale oil is super light sweet, little value for most refineries as heavy oil is needed to produce the full spectrum of fuel products. Also a fully commercial refinery plant costs $9bn investment, the life span of a refinery must be at least 20 years to recover the investment return, that is why most refineries are seeking long term secure crude supplies. However, shale oil well has very high decline rate, so shale oil is only good for being blending stock but never long term primary stock for any refinery. 4. There is another silly reporting about the Permian bottleneck take away transportation, the problem is not there are not enough pipelines being built but the pipeline company can not justify to invest any capital to build more pipelines if they know the Permian shale oil production will be declining significantly in less than 10 years time.

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