OPEC opts for a show of unity - and a clever compromise

June 22, 2018 / www.woodmac.com / Article Link

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LONDON/HOUSTON/SINGAPORE, June 22, 2018 - OPEC has delivered a compromise that shows the commitment to unity that Saudi Arabia - and Russia - hoped for.  Both countries worked hard to address the various issues facing the group and its non-OPEC partners. 

Ann-Louise Hittle, vice president, macro oils, said: "Faced with an uncertain supply outlook for two key OPEC members - Iran and Venezuela - and pressure from the US government to address high prices, OPEC delivered an agreement that keeps Iran in the fold, despite its resistance to higher production.

"Today's meeting was arranged to give OPEC the opportunity to review production restraint and make sure it was still needed. This was an addition to the November 2017 accord, in response to Russian pressure to have an escape clause if production restraint were to be imposed for all of 2018."

Ms Hittle added: "OPEC avoided a decision to fully lift production restraint by instead agreeing to lower its adherence to the current accord from the current 152% to 100%, a clever way to increase output without officially agreeing on an end to output curbs. This should bring a total of 0.6 million barrels per day (b/d) back into the market during H2 2018."

Wood Mackenzie's analysis shows this volume would meet demand growth and provide a cushion of additional supply in 3Q 2018, when we project an implied stock draw of as much as 0.5 million b/d before the OPEC additions. That will help ease upward price pressure during the peak US oil demand summer driving season.

Ms Hittle said: "Unless there are further supply outages, we expect this will keep prices stable. However, the 23 June meeting with non-OPEC producers will provide further clarity."

On 23 June, non-OPEC producers will gather to consider their side of the deal with an initial understanding that the leader of the non-OPEC partners, Russia, may increase its production by potentially as much as 0.3 million b/d by end-2018. 

"Added to OPEC's increase in output of 0.6 million b/d that would leave Q4 2018 with a typical seasonal build in inventories," Ms Hittle said.

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