June 2018 OPEC Meeting: What to Expect

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Oil & Gas

The oil market is facing one of its most critical moments in years.

Beginning Friday, OPEC and its allies will hold a two-day meeting to discuss the cartel’s oil output…

And it’s poised to be a contentious one.

Threats have already been lobbed, adding another layer of ire to an already tumultuous global trade situation.

As most Energy & Resources Digest readers are probably aware, at the start of 2017, the market was awash in cheap crude. So OPEC and a cadre of non-OPEC friendlies, like Russia and Mexico, agreed to reduce their oil production by 1.8 million barrels per day (bpd) because they were getting burned.

The agreement was a resounding success.

And global stockpiles of crude tumbled down to their five-year averages.

This stabilized the oil market and sent prices to multiyear highs…

In fact, from the start of January 2017 to its high last month, U.S. crude gained more than 38%, according to Macrotrends. And it’s risen more than 100% from the February 2016 low of $26 per barrel.

Today, OPEC production has fallen to 31.9 million bpd. And the 14-member cartel, plus the seven other countries that joined in the cutbacks, are saying “mission accomplished.”

That’s all despite the U.S. going against the rest of the world and ramping up production to record levels of nearly 11 million bpd.

But now there’s trouble brewing…

And this week’s meeting could potentially result in disaster.

A House Divided

Saudi Arabia and Russia have shouldered most of the cuts to date. Now the duo wants to increase production between 500,000 and 1.5 million bpd. This would begin in July… just days from now.

Under the plan, OPEC and its allies, like Russia and Mexico, would boost production by 1 million bpd this year. And then by another 500,000 bpd in 2019.

But not everyone is on board.

The problem is that Iran, Iraq and Venezuela have promised to veto any output increase. Kuwait and Oman are rumored to be opposed to raising quotas too.

Plus, adherence to the agreed-upon reductions is starting to unravel.

Russia currently accounts for half of all the production cuts by non-OPEC members. And it’s not even meeting its cutback targets… though neither is Iraq.

Meanwhile, Venezuela had promised to cut output by 95,000 bpd. But due to the country’s economic crisis and collapse, it reduced production by more than seven times that amount – 675,000 bpd – in May.

And Iran is facing a new round of sanctions.

None of these countries can currently afford to see crude supplies increase and prices dip.

That said, Iran has found a very oil-thirsty ally before the U.S.-imposed sanctions take effect.

India imports 80% of its oil and had to reduce its Iranian imports by half during the last round of sanctions. So, in May, the country’s largest refiner, Indian Oil Corp., ramped up Middle East purchases sevenfold.

All eyes will be on the OPEC meeting Friday. And we now have this cacophony of trade war threats from the U.S., China and Europe adding to the pressure.

But here’s the deal… All production decisions by OPEC need to be unanimous.

That doesn’t seem likely this time around.

And if Saudi Arabia and Russia move to increase production, they’ll be in violation of their own agreement.

The Seven-Year Itch?

As a well-known trend trader, I know the oil markets move in waves and cycles. So what’s fascinating to me is that the current mood is reminiscent of the June 2011 OPEC meeting.

At the time, crude prices were above $100 per barrel.

Saudi Arabia campaigned to increase production to support the global economy. The Gulf kingdom believed high prices were having a negative impact on demand. And revolution was sweeping through the region on the wings of the Arab Spring movement, disrupting supply.

Iran, Venezuela and Algeria stood grimly on the other side of the aisle.

Iran believed the global economy was slowing anyway, and that increasing supply would force prices down to $80 per barrel. For Iran and Venezuela, any decline would impact their domestic spending programs.

It was a contentious meeting. The two sides couldn’t even agree on how to word the closing press release.

But in the end, there was no production increase.

And crude prices instantly spiked higher.

Of course, Saudi Arabia does what Saudi Arabia wants to do.

It’s the biggest player in the game and the largest producer in the cartel. Following the June 2011 meeting, the kingdom defied OPEC and boosted its production anyway, selling excess supply to China and other growing Asian countries.

A few months later, at its next meeting, OPEC agreed to raise its production ceiling. No one was sticking to the agreed-upon supply quotas anyway.

What It All Means

At the moment, U.S. crude is around $66 per barrel, according to Bloomberg. Prices have fallen nearly 11% over the past month ahead of this OPEC meeting and the threat of increasing output.

Without unanimity, I don’t see OPEC officially raising production… at least not by 1.5 million bpd.

You might see a compromise of 500,000 bpd. But in the end, the decision is more symbolic than anything else.

This feels like a redux of the 2011 meeting. Saudi Arabia and Russia may simply do whatever they want… because who’s going to stop them?

But that doesn’t mean prices will simply crater. Demand is still strong. And that will provide a floor for oil prices.

Good investing,

Matthew