OPEC+ can opt to reduce their collective production cuts in H219

Baku, Azerbaijan, May 2

By Leman Zeynalova – Trend:

OPEC+ is expected to opt to reduce their collective production cuts in H219, Fitch Solutions Macro Research (a unit of Fitch Group), said in its report with focus on the recent decision of the US not to extend the sanctions waivers for Iranian oil importers, Trend reports.

“ President Trump has opted not to renew the 180-day US sanctions waivers that were awarded back in November to key buyers of Iranian crude. These waivers expire on May 2, at which point exports should – in theory – drop to zero. It appears he is gambling that the sharp decline in Iranian exports will not lead to any significant increase in the price of crude,” reads the report.

Fitch Solutions believes that how prices are ultimately impacted is, at this stage, highly uncertain.

“On the one hand, there is adequate supply to offset the volumes los t from Iran – up to around 1.25mn b/d, based on average exports over the last 180 days . As of March, OPEC and Russia were holding 1.37mn b/d out of the market, much of it being of similar quality to Iranian crude. Saudi Arabia has around 1.4mn b/d of additional spare capacity on top of that, although it is unlikely that they would want to bring much of this into play,” said the company.

“The White House claims to have had assurances from Saudi Arabia, the UAE and other key producers that they will bring back online the volumes needed to counteract losses from Iran. Saudi Energy Minister Al Falih has been more guarded in his comments. He emphasized the kingdom’s continuing commitment to the OPEC+ production cut deal and signaled the possibility of an extension in June. However, he also reaffirmed that Aramco is both willing and able to raise its production in response to demand. The speed and magnitude of any increases out of Saudi Arabia will be a key factor deciding where prices move to in the coming one to two months. We expect a more measured approach from the kingdom than was seen last year, leaving s cope for Brent to roam higher.”

On the flip side there is the issue of compliance with sanctions , which Fitch Solutions does not expect will be 100 percent.

“Beijing opposed their reimposition in November and its rhetoric in response to the non-renewal of waivers has been equally strong . Among Iran’s buyers, China is likely the best-positioned to navigate around sanctions. That said, trade negotiations are ongoing between Washington and Beijing and this must factor into their calculations,” the report saod.

Iran has a number of options open to it to move its oil out to market, including non-USD and barter transactions , ship-to-ship transfers and blending into other regional grades and trucking barrels across borders, according to the company.

“Any counterparty to these trades will take on a considerable degree of risk: the combination of limited exposure to the US banking system, a tight oil market and high prices would encourage a company to take this risk on. It may be significant that the number of cargoes exported to ‘unknown’ destinations has been generally higher under sanctions and rose considerably in the first half of April. We assume that ‘zero exports’ will in fact translate into exports in the range of a few hundred thousand barrels per day.

We are ballparking a range of 300,000 -600,000 b/d averaged over the rest of the year, although the uncertainties surrounding this forecast are clearly very high.”

Possibly the larger risk to prices stems from the thinning of the global spare capacity buffer, according to Fitch Solutions.

“Given the declines we expect to see in Iran, it is likely that OPEC+ will opt to reduce or unwind their collective production cuts in H219 . After this point, the vast bulk of s pare capacity will be held by Saudi Arabia, which can raise production to as high as 12.0mn b/d. However, bringing this capacity online takes time and involves considerable capital, which they may be reluctant to invest given that a change of government in Washington in 2020 could see a relatively rapid return of Iranian barrels to market. Sacrificing its spare capacity would also impair the kingdom’s influence over oil prices . Effectively then, following the return of cut OPEC barrels to market, there will be little flexibility left to deal with unplanned outages elsewhere. The risks here are not inconsiderable, in light of rising instability in a number of key producers , notably Libya and Venezuela.”

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Follow the author on Twitter: @Lyaman_Zeyn

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