The Organization of the Petroleum Exporting Countries and Russia will pivot this week and boost output enough to stabilize prices while increasing their revenue.
The cartel’s biggest producer and exporter, Saudi Arabia, is seeking to broker an agreement on production levels ahead of the June 22 OPEC meeting in Vienna.
The kingdom is hoping to reach a compromise between Russia, which wants to produce at maximum capacity, and Iran and Iraq, which strongly oppose any output increases.
Crude oil prices have rebounded since 2016, when OPEC and Russia cut production by 1.8 million barrels a day. Since then, prices have more than doubled, from a low of $27 a barrel for the benchmark West Texas Intermediate grade to $65 on Monday.
Saudi oil minister Khaled al-Fatih said in Moscow on Thursday that OPEC and Russian production increases were “inevitable.”
“Saudi Arabia is once again back in the driver’s seat,” Helima Croft, global head of commodity strategy at RBC Capital Markets, wrote in a note to investors.
Saudi Arabia is also seeking to boost oil exports enough to cushion American consumers and mollify President Trump.
Now that Trump has jettisoned the nuclear deal with Iran, the kingdom’s longtime rival, Saudi leaders plan to fulfill their pledge to increase production enough to offset the loss of Iranian oil sales resulting from the reimposition of U.S. sanctions.
Although the sanctions won’t bite fully until November, Trump is already impatient with the Saudi response. Last week, for the second time, the president called on OPEC to increase production. “Oil prices are too high, OPEC is at it again. Not good!” Trump said in a Wednesday tweet.
Analysts expect Russia and OPEC to boost output by about 500,000 barrels a day now and as much as 1.2 million barrels a day by the end of the year.
Saudi Arabia might also want to defuse threats from Congress, according to Robert McNally, president of the Rapidan Energy Group and a former National Security Council energy director. Lawmakers are unhappy with Saudi Arabia’s role in the civil war in Yemen. In addition, McNally notes, members of the House Judiciary Committee have marked up a bill called the No Oil Producing and Exporting Cartels Act (NOPEC), which would allow the Treasury Department to sue OPEC producers under the Sherman Antitrust Act. In his 2008 book, Trump had a chapter sub-heading that read: “Sue OPEC.”
Indeed, the coordinated actions of OPEC and Russia are the reason for the rebound in oil prices over the past 18 months — along with supply disruptions in Venezuela, Nigeria and Libya and rising demand globally.
OPEC producers with the flexibility to trim production — Saudi Arabia, Kuwait and the United Arab Emirates — combined with non-OPEC nations Russia and Oman to slash exports. That forced industrialized consumer countries to reduce inventories to just below the five-year average.
The political crisis in Venezuela has also been a major factor. Venezuela produces about 1 million barrels a day less than it did two years ago, and the International Energy Agency forecasts that the loss of an additional 1 million barrels a day might be unavoidable.
The state oil company, Petroleos de Venezuela (PDVSA), is unable to maintain its infrastructure. Croft says it has “turned into a mere cash register for the military, severely depleting its technocratic bench.” Buying equipment from abroad is difficult. The United States imposed sanctions restricting trading in Venezuelan sovereign debt, including PDVSA.
In addition, the International Chamber of Commerce ruled in April that PDVSA owed ConocoPhillips $2.04 billion in compensation for the nationalization of the Hamaca and Petrozuata oil projects. The U.S. oil giant has since seized cargoes of PDVSA crude and fuel from storage terminals in the Caribbean.
McNally said that “Venezuela is imploding,” and he and other analysts say its production could plunge an additional half-million to 1 million barrels a day.
In Iran, U.S. sanctions could cut oil sales by 400,000 to 500,000 barrels a day. Many big European firms are already pulling out of the country. Iran hopes that fast-growing nations including China and India might continue or increase purchases, but India’s Reliance Industries and Nayara Energy already have indicated that they will probably fall in line with U.S. measures.
The terms of U.S. sanctions allow the president to accept “significant” if not total cuts in international oil purchases from Iran. But Trump has latitude over how that translates into percentages. Under President Barack Obama, 20 percent was enough. It’s not clear what Trump might demand.
Iran says none of this requires an increase in OPEC production now. In a tweet, Oil Minister Bijan Zangeneh said that the “oil market is currently faced mainly with political tensions created by the US president on the international scene, having nothing to do with supply-demand balance.”
In the past few years, any effort by OPEC to boost prices has been curtailed by a rise in shale oil drilling and production in the United States. U.S. crude oil production has increased to more than 10 million barrels a day for four of the five most recent months recorded, more than double the production of a decade ago.
But a lack of pipeline infrastructure in the Permian Basin in Texas is limiting exports of U.S. crude oil. And Canadian oil exports by pipeline and railroad are rising, contributing to the bottleneck.
“A tight global oil market requires more shale production, yet the Permian will soon be unable to provide it,” Goldman Sachs analysts wrote in a note to investors.
Bank of America Merrill Lynch said that U.S. drilling activity “has more than doubled since bottoming in mid-2016,” with much of that focused on the Permian Basin. It said that Permian infrastructure additions “have been unable to keep pace with output growth.” The investment firm said, “In short, US oil producers are starting to hit a wall.”
“The U.S. ability to export has been pushed to the limit,” David Ernsberger, global head of energy pricing and director of global content on oil at S&P Global Platts, said in an interview. “Pipeline capacity has maxed out. There is a huge logjam in the Gulf” of Mexico.
Underpinning the OPEC negotiations is the slow but steady rise in global oil consumption. In recent years, many experts have forecast that the world is approaching “peak demand,” when consumption would turn steadily downward. But the International Energy Agency is forecasting a 1.4 million-barrel-a-day increase in consumption this year and the same next year. That combined amount would be twice Nigeria’s current output and would exceed the exports of the United Arab Emirates.