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Saudis can produce a little more without breaking OPEC commitments

Oil&Gas Materials 27 May 2019 15:50 (UTC +04:00)

Baku, Azerbaijan, May 27

By Leman Zeynalova – Trend:

The deal concluded in December 2018 between OPEC (14 member countries) and 10 non-OPEC countries delivered good results, Francis Perrin, Senior Fellow at the Policy Center for the New South (PCNS, Rabat) and at the French Institute for International and Strategic Affairs (IRIS, Paris) told Trend.

“Thanks to a production cut of 1.2 million barrels per day, of which 800,000 b/d by OPEC countries, crude oil prices increased significantly from their end-2018 levels even if other factors also played a role (a rising world oil demand, US sanctions against Iran, political tensions in the Gulf region and the incapacity of Venezuela to stop the fall in its oil production and exports). According to the Joint Ministerial Monitoring Committee (JMMC), set up by OPEC and non-OPEC countries, the average conformity to OPEC and non-OPEC (OPEC+) commitments was 120 percent between January and April 2019,” the expert noted.

Perrin believes that one of the most logical options would be to extend the validity of the December 2018 agreement, which covers the first half of 2019, to the second half.

“Prices are comfortable for oil exporters but not very high ($68.6/b for North Sea Brent on 24 May on the London market) and they fell in the recent period after a peak of around $75/b during the first half of 2019. Moreover US oil production is going up in 2019; oil stocks in OECD countries are rather high and OPEC countries follow this indicator very closely; US crude stocks are now estimated at 476.8 million barrels, up 38.6 million barrels from a year earlier. And OPEC must have unanimity within its ranks in order to change its present production ceiling, which is not easy to achieve,” he said.

On the other hand, the expert pointed out that US pressures on OPEC, and especially on Saudi Arabia, are very strong.

“President Donald Trump wants more oil on the market in order to avoid rising oil prices, which would not be very good for the world and the US economies and for Donald Trump's reelection hopes at the end of 2020. The US is the protector of Saudi Arabia, the United Arab Emirates and Kuwait, three OPEC member states. As seen from Saudi Arabia and the UAE, the rise of the Iranian threat and the need to close the ranks with the US is a political factor which will be taken into account in the OPEC decision-making process. But it is very likely that Iran, which is also part of OPEC, would veto any attempt from this organization to increase its production at Tehran's expense,” noted Perrin.

Another scenario, according to the expert, would be for Saudi Arabia to increase its production without OPEC's agreement.

“It is not the most likely scenario but it cannot be totally ruled out, particularly in the case of rising oil prices and the risk of an oil shortage due to falling Iranian and Venezuelan oil exports. In the short-term Saudi Arabia can produce a little more without breaking its OPEC commitments as this country's output level is below its OPEC production quota,” said the expert.

Perrin noted that Russian oil companies are not very happy with their country cooperation with OPEC since the end of 2016 within the framework of OPEC+.

“They would like to be able to produce a little more but President Vladimir Putin thinks that this partnership with OPEC, and especially with Saudi Arabia, is an important strategic issue for Russia. It is thus likely that Russia will go on participating in the OPEC+ cooperation even if it will try to soften the December 2016 agreement,” he concluded.

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Follow the author on Twitter: @Lyaman_Zeyn

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