Commodities

OPEC heads to Vienna with divisions on supply still wide – Commodity News Preview

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At the end of this week all eyes will be in Vienna where the Organization of the Petroleum Exporting Countries (OPEC) and its allies will gather to review a supply cut agreement signed by OPEC members, as well as by key non-OPEC oil producers including Russia, in December 2016. The deal which aimed at boosting oil prices – as those halved over the span of two years – is now anticipated to increase oil output, threatening to enlarge the bearish wave in the market as of late. Still, the battle could intensify as not all OPEC members are in favor of the potential adjustment.  

The rise in the US dollar, issues relating to the Iranian nuclear deal, declining demand in Europe and fast-rising supply in the US, were among factors that drove crude oil prices down from around $112/barrel in early 2014 to $26/barrel in the first months of 2016. OPEC, fearing that the tumble in oil prices could lead to an investment drought decided in December 2016 to limit production by 1.2 million barrels per day (bpd), putting a cap at 32.5m bpd. Non-OPEC counties such as Russia who participated in the talks agreed to contribute to these efforts too, reducing their own output by 0.6m bpd and hence bringing the total amount of reduction to 1.8m bpd. In the 18-month period following the implementation of the agreement in January 2017 and after an extension of the deal up until the end of 2018 in November, WTI crude oil prices, which were trading at $54 per barrel at that point, managed to surge by 34%, at one point in May 2018 reaching a 3 ½-year top of $72.83. The London-based Brent crude also benefitted, gaining 41%, peaking at $80.50 a few weeks ago. In terms of compliance with supply cuts, the rise in prices indicates that it was overall at satisfactory levels.

However, a few weeks before OPEC’s two-day policy meeting that kicks off on June 22, oil prices started retreating from their aforementioned peaks in the wake of news that Saudi Arabia and Russia are considering to reverse part of their supply cuts. Particularly, during a meeting in St. Petersburg on May 25, the Russian energy minister, Alexander Novak, and his Saudi Arabian counterpart, Khalid Al-Falih, signaled that a rise in output could be in the cards at this week’s gathering, as a countermeasure against production shortfalls, such as in Venezuela, where a political and economic crisis have blocked oil producers from reaching their export terminals.

Russia is now expected to ask for an increase in the supply of 1.5m bpd according to Novak’s latest comments on Saturday, a larger amount than the 1.0m bpd said to be agreed with his Saudi Arabian colleague on May 25. Saudi Arabia from its side is said to call for an increase somewhere between 0.5-1m bpd. Such prospects though, found some OPEC members on the opposite side, with Iran, Iraq, Venezuela, and Algeria threatening to veto such action. Iran, the third largest OPEC supplier, which is likely to suffer from renewed US sanctions, has been constantly advising OPEC to stand pat on the agreement. However, on Thursday, the Iranian energy minister Bijan Zanganeh showed some sympathy, saying that Iran could be open for a moderate increase if certain conditions are met.

While Iran’s willingness to narrow differences with the “supply-hike” supporters shows that a sort of agreement could be eventually reached at this week’s meeting, it is still a question whether even a small rise could satisfy those who are pushing for steeper increases as those might demand a larger increase to offset steep falls in political and economic risk countries such as Venezuela where production has been sharply declining the past few years.

Turning to oil prices and given that investors have already priced in a potential rise in supply, a smaller-than-expected increase could provide some support to WTI crude oil, potentially leading the price up to the June 15 peak of 67.12, which overlaps with the 38.2% Fibonacci retracement level of the downleg from 72.83 to 63.59. A bullish move higher could also touch the 50-day (simple) moving average at 68.15, meeting the 50% Fibonacci mark as well, while a steeper rally could surpass the 61.8% Fibonacci level of 69.30 with scope to test the 70 psychological level.

Otherwise, in case the meeting delivers a larger-than-expected output rise in the region of 1.5m bpd, then the market could face further pressure, with the price falling towards the previous low of 63.59. A step below that level could also open the door for the 62 key-mark.