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OPEC rejects Trump's claims of oil price fixing; consensus emerging to extend cuts

April 23, 2018 (11:48 mins)



It says something about the state of communication and diplomacy in this day and age that a tweet from the US president sent shockwaves through an OPEC/non-OPEC Joint Ministerial Monitoring Committee (JMMC) meeting in Jeddah, Saudi Arabia, on April 20, 2018. "Looks like OPEC is at it again," President Donald Trump tweeted. "Oil prices are artificially very high! No good and will not be accepted." It came just as the JMMC announced that they might extend their crude oil production cuts to prop up the market.

On this episode of the S&P Global Platts OPEC Outlook podcast, senior oil writer, Herman Wang, recaps the meeting and the reaction to the president's social media comment, which livened up what had been a fairly uneventful affair.


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Podcast Transcript


It says something about the state of communication and diplomacy in this day and age that a tweet from the US president sent shockwaves through an OPEC/non-OPEC monitoring committee meeting in Saudi Arabia.


"Looks like OPEC is at it again," President Donald Trump tweeted on Friday. "Oil prices are artificially very high! No good and will not be accepted”


The tweet came just as the monitoring committee announced that they might extend their production cuts to prop up the market, because, well, the global economy needs them to.


So on this episode of the S&P Global Platts OPEC Outlook podcast, we’ll recap the meeting and the reaction to the president’s tweet, which livened up what had been a fairly uneventful affair.


I’m your host, Herman Wang, thanks for listening.


Well let’s start at the beginning, in fair Jeddah, where we lay our scene:


Ministers from the six-country monitoring committee overseeing the 1.8 million b/d production cut agreement between OPEC and 10 allies, including Russia, gathered on Friday at the swanky Ritz Carlton hotel in the historic Saudi port town of Jeddah, on the Red Sea.


The ministers were in Jeddah to ostensibly review compliance with the agreement and discuss the state of the oil market.


Supply and demand balances have tightened significantly since the 24-country OPEC/non-OPEC coalition began its production cuts in January 2017. Almost 16 months later, OECD commercial oil inventories – that’s the barrels held in storage by companies in developed nations – were nearing their five-year average. That’s the target that OPEC had said it was aiming for with the cuts, when they talk about rebalancing the market, and so the International Energy Agency declared that it was basically Mission Accomplished for the OPEC/non-OPEC coalition.


Well, not so fast. Members of the group have enjoyed the rise in oil prices, up to four-year highs in recent days, that they want to continue the party.


And at this meeting, they concluded that they’re going to keep on with the cuts. Maybe even extend them beyond their scheduled expiry at the end of 2018.


Why? It’s for the good of the market, to stimulate a healthier economy in which both producers and consumers can thrive.


See, back in 2015 and 2016, when oil prices were in the dumps, down to $27/b in January 2016, due to the oversupply in the market caused by the surge in US shale production and, it must be said, a fierce pump-at-will marketshare battle by OPEC members and Russia – remember Russia was producing at a record high of more than 11 million b/d to become the world’s largest oil producer, surpassing Saudi Arabia, which was pumping close to 10.7 million b/d, and you also had Iran coming off of sanctions, among other things – well that price slump caused a lot of oil companies to cut back on their spending on new projects.


Why invest in expensive deepwater or oil sands projects, when finances are tight due to this low-price investment. So projects were deferred or canceled, and that’s led to concerns among some market watchers – including the iEA, that the world may face a supply crunch in a few years.


Oil plays typically take at least five years, maybe eight or even 10 or more, to come online, once you get the exploration done, the financing lined up, the technical assessments, the equipment and infrastructure set up, the commercial agreements signed, etc.


So the cutbacks in industry spending over the last couple of years may come home to roost over the next few years, and if the global economy keeps expanding, as many people expect, oil demand will likewise rise.


Not enough supply, increasing demand…it’s a recipe for another price spike, global recession, a push away from fossil fuels…all scenarios that OPEC would like to avoid.


So what OPEC is now saying is that we need to continue our production cuts to create an environment where companies will be incentivized to invest.


Here’s Saudi energy minister Khalid al-Falih to explain.


[CLIP]


So what does this mean going forward? Well expect OPEC at its next meeting June 22 in Vienna to possibly announce an extension of the cuts. That’s what they seem to be signaling anyway, and it seems to be what Saudi Arabia, OPEC’s largest producer, wants.


But there are some signs that not everybody is on board. Iran, which isn’t on the monitoring committee and wasn’t in Jeddah, has been warning that it doesn’t want prices to much above $60, for fear of prompting a further surge in US shale production and undoing the price rise that they’re enjoying so much.


At the end of the day, though, Iran isn’t really cutting production under the deal. They were given somewhat of an exemption. They didn’t have to cut, just promise to hold their production near their maximum capacity of about 3.8 million b/d.


If Saudi Arabia and its gulf allies want to keep cutting, there’s not much Iran can do to stand in their way.


But Russian energy minister Alexander Novak, who co-chairs the monitoring committee with Falih, also seems to have some misgivings about potentially overtightening the market.


He told reporters ahead of the meeting that the OPEC/non-OPEC coalition might talk about easing the production cuts at the June meeting if market conditions warrant. I’d play the audio for you, but it’s in Russian, and well, I’m doing this podcast in English.


After the meeting concluded, though, he indicated he was on the same page as Falih. Here’s his translator


[AUDIO]


So all was well in OPEC/non-OPEC monitoring committee land. Everybody was unified behind the cuts and the desire to keep prices elevated. The ministers went off to lunch, maybe they had some of that seafood that Jeddah is known for. And it was OPEC Secretary General Mohammed Barkindo’s birthday! He turned 59 years old, and the ministers celebrated with cake and a song.


Then came the tweet.


Journalists covering the meeting, who had been busy filing their stories from the post-meeting press briefing, were jolted out of their in-the-zone writing mode, at least I was, and you could see it as reporters checked their phones and twitter feeds, the spreading realization that Donald Trump had just blew up our stories.


Reporters rushed to the door of the room where the ministers were having lunch, and as ministers would come out, reporters hounded them. Saudi energy minister Khalid al-Falih left the room to use the bathroom. Reporters waited outside the bathroom for him to finish his business, then when he came out, he was bombarded—minister what do you think of the tweet? Are you worried? Are oil prices artificially high?


All Falih would say was that there was no such thing as an artificial price, that the markets set the price.
Somewhat curious, given that this OPEC/non-opec producer group is working in concert to cut oil supplies and prop up the market.


But here’s Barkindo, saying, you know what? US oil producers have a lot to be happy about from OPEC’s production cuts, and in fact, some of them have said thanks, OPEC.


[AUDIO]


Remember, Barkindo has hosted dinners with US shale companies so that they can, as he says, understand each other better, though they aren’t coordinating any policy or even talking about policy, for fear of running afoul of antitrust laws.


So what does President Donald Trump mean with his tweet, that these artificially high prices are no good and will not be accepted?


Can he actually do anything about these OPEC/non-OPEC cuts?


Well, not really all that much, from a policy perspective, according to analysts my colleague in Washington, Meghan Gordon, talked to.


In fact, it may be an effort to distract from some of the geopolitical risk premium in the oil market that Trump himself has created. He’s threatened to withdraw from the Iran nuclear deal and reimpose sanctions that analysts say could impact up to a half million or even 700, 800 thousand b/d of Iranian crude exports.


Trump has a May 12 deadline of deciding whether to keep waiving sanctions on Iran.


He’s also considering tightening the sanctions ratchet on Venezuela, which is already seeing its crude production in freefall due to the country’s cash shortage, crushing debt, labor unrest, crumbling equipment, the list of difficulties, shall we say, goes on and on. Our latest S&P Global Platts OPEC production survey had Venezuela at 1.49 million b/d in March, that’s the lowest since we’ve been doing this survey, which started in 1988, except for a Venezuelan industry strike in late 2002 and early 2003.


Venezuela’s got an election coming up May 20, which current president Nicolas Maduro seems all but certain to win, and some analysts think that could be the catalyst for further US sanctions.


So, the market is already tightened, and it’s facing these further threats of supply declines, if Trump pulls the trigger on these sanctions.


It’ll be left up to Saudi Arabia, which is sitting on some 2.5 million b/d of spare capacity, and its Gulf allies to possibly ramp up production if they are worried about overtightening the market, but so far, they’re letting these situations play out.


It’s definitely going to make for some potentially eventful weeks ahead as OPEC gears up for its June 22 meeting, where we’re expecting some kind of decision on the future of this production cut agreement.


Of course, we at S&P Global Platts will keep our eyes on all of this. And that’s a wrap for this episode of the OPEC Outlook podcast, which is coming to you from Saudi Arabia, where I’m recording this.
Platts OPEC Outlook is produced by myself, Herman Wang, and our web editor Paul Maguire in London. Thanks for listening.






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