Is OPEC About To Surprise The Oil markets?

Is OPEC About To Surprise The Oil markets?

A day before the OPEC summit kicks off, top officials from the oil cartel say that the markets are moving in the right direction, a sign of confidence that suggests little could emerge from this week’s meeting.

Few expected the June 2 meeting to result in some sort of agreement on supply cuts or even a production freeze, given the enmity between several of the group’s top members. The collapse of the Doha summit in April, a meeting that only sought to implement a very modest freeze deal, suggests that any cooperation is almost certainly off the table.

However, even since April the chances of a deal have narrowed. That is because oil prices have continued to climb, trading just below $50 per barrel on the eve of the semi-annual OPEC meeting in Vienna.

“From the beginning of the year until now, the market has been correcting itself upward,” U.A.E. oil minister Suhail Al Mazrouei told reporters from Vienna on May 31. “The market will fix itself to a price that is fair to the consumers and to the producers.” Oil prices have moved up nearly 90 percent since the February lows of $27 per barrel. This extraordinary rally has taken the pressure off of OPEC to take coordinated action on cutting or freezing output.

Nevertheless, it might still be a bit early for OPEC to claim victory. The major supply outages in Canada and Nigeria helped to push up crude oil prices over the past month. Canadian oil producers, led by Suncor Energy, are getting back to work. The prospect of a return in large sources of supply has halted the price rally just short of $50 per barrel.

“I think the market trends are better now” Emmanuel Ibe Kachikwu, Nigeria’s oil minister said in Vienna. Oil prices are moving “in the right direction” but he said that he thinks “it needs more acceleration of the pace.” While he may want prices to rise faster, OPEC members appears unwilling to cooperate in order to make that happen.

Instead, the goals for the OPEC meeting are much more modest: to patch up broken relationships and cobble together some sort of foundation for cooperation. All eyes will be on Saudi Arabia’s new oil minister Khalid al-Falih, who replaced the well respected and long-time former minister Ali al-Naimi. Mr. Naimi worked well with the group, even though Saudi Arabia has competing and sometimes hostile relations with other members (namely, Iran). Bloomberg reports that al-Falih comes to the meeting with the goal of mending fences with its fellow OPEC members, hoping to restore trust after Saudi Arabia killed off the Doha deal. Saudi Arabia wants to reassure OPEC that it will not flood the market, and may even be open to reinstating production targets.

It is hard to see how OPEC could agree on such an outcome, unless the production targets were substantially higher than the previous ones. Several OPEC members, including Saudi Arabia, are producing in excess of those former targets, and Riyadh has shown no willingness to cut back on production unless Iran does as well. Iran, of course, has refused to limit its output until it brings production back to pre-sanctions levels. The IEA said in its May Oil Market Report that Iran succeeded in boosting oil production to 3.6 million barrels per day, a level not seen since before the harsh 2012 sanctions. Iran insists it still has some lost ground to recover and has not expressed an interest in production limits.

In short, not much has changed since the April Doha summit collapsed in acrimony. If anything, the rise in oil prices has erased the urgency to make collective sacrifice. Bloomberg surveyed 27 oil analysts, polling them on what they expect to happen in Vienna. All but one of them project that the group will fail to set a production target. Perhaps the best the group can hope for is a restoration of some trust that could lay the groundwork for cooperation at some point in the future.

On the other hand, the past few OPEC meetings have defied expectations, ending with surprise announcements. One should not entirely rule out another unexpected result.