Tensions to rise in OPEC meeting May 25: Manaar Energy

Baku, Azerbaijan, May 19

By Leman Zeynalova – Trend:

Intent within OPEC is serious and genuine, but cohesion remains a challenge, which leads to the expectation that tensions will rise into the meeting on May 25, Manaar Energy, a Middle East consultancy that specializes in GCC/OPEC oil strategy said in its analysis.

“We expect there to be a distinction between exports and production with members wanting more flex on local production and cuts to be applied more to exports,” said the analysts. “Due to domestic politics, it is inevitable that compliance drops; expect a ‘cheat margin’ of 10-15 percent.”

Saudi Arabia will tolerate Libyan and Nigerian volume, Manaar Energy believes.

“But we expect the Kingdom will no longer bear the burden of the cuts at all costs and will want stronger participation and not just support from Russia, Iran and Iraq,” said the analysis.

While Russia shares Saudi Arabia’s interest to see stable prices and supply, the appreciation of ruble against the dollar (under flexible exchange rates) amid weak oil prices has offered Russia a financial cushion, whereas Saudi Arabia’s fixed exchange rate has worsened the blow of falling oil prices, explained the analysts.

Manaar believes that Russia’s improved economic position could drive it to support the OPEC rollover but to let Saudi Arabia bear a greater burden of the cuts in the knowledge that Saudi Arabia has a more pressing need for stable oil prices.

“Saudi's ability to increase exports while cutting production (by burning less crude) will likely be a point of contention during the meeting, especially from Iraq,” said the analysis. “We think that Saudi will continue to justify this point by highlighting its need to rebuild domestic crude stocks in advance of increased seasonal demand.”

Manaar Energy maintains its base case that an agreement will be reached at the OPEC meeting on May 25 to roll over the existing cuts from November 2016 and effective from May 2017.

“Despite the threat from US shale, we think that the risk of a complete breakdown in negotiations is relatively lower,” said the analysts.

In December 2016, OPEC and non-OPEC producers reached their first deal since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices.

Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce output by 558,000 barrels per day starting from Jan. 1, 2017 for six months, extendable for another six months.

OPEC agreed to slash the output by 1.2 million barrels per day from Jan. 1.

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Follow the author on Twitter: @ Lyaman_Zeyn

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