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OPEC and its allies grapple with murky market outlook as they prepare to meet in Vienna

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OPEC and its allies grapple with murky market outlook as they prepare to meet in Vienna

Highlights

Rollover of supply cut agreement likely outcome

G20 talks may overshadow OPEC meeting

Secretary general up for term renewal

London — Three months ago, OPEC and its allies deferred a decision on extending their oil production cuts beyond the first half of the year, cancelling a planned April meeting to get a better read on the market.

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With the 1.2 million b/d cut agreement set to expire in three days and OPEC ministers set to meet Monday in Vienna, the signals appear no clearer.

Bearish outlooks for demand and unresolved global trade disputes have kept a lid on prices, even as many forecasters predict a tight market ahead on supply risks caused in large part by US sanctions.

Heightened Middle East geopolitical tensions following a series of attacks on oil tankers and other infrastructure in the Middle East in recent weeks have failed to reverse the bearish sentiment.

Faced with the uncertainty and with oil prices still slumping, many OPEC ministers have signalled that an extension of the cuts is the preferred option.

The exact length and level of the cuts is yet to be negotiated, with some Russian oil companies pushing for their country's quota to be eased, while Algeria has reportedly floated a deeper cut to provide a price boost.

But a rollover of the current agreement is the most likely scenario, Russia's public ambivalence nonwithstanding, said Shin Kim, S&P Global Platts Analytics' head of supply and production.

"Further cuts will likely be discussed but are unlikely to be adopted," she said. "Russia is satisfied with $60-65/b oil and is unlikely to agree to further cuts given oil producer company resistance.

It is the fear of substantial price declines from this level if the cut is not extended that the Russian government fears."

The OPEC/non-OPEC coalition also has flexibility to raise output and still maintain the parameters of the deal, given that Saudi Arabia has voluntarily lowered its production some 600,000 b/d below its quota to "lead by example" and sanctions-hit Iran and Venezuela continue to see their volumes slide.

Front-month ICE Brent futures were trading at $66.01/b at 0913 GMT Thursday, up 20% since the beginning of the year but still some $10/b below the optimal level that OPEC kingpin Saudi Arabia and other core members would likely prefer for their budgets.

PUTIN, MBS MEETING

The OPEC schedule, finalized only days ago after a prolonged spat over the meeting date, calls for a delegate-level Joint Technical Committee to convene Sunday morning and the nine-country Joint Ministerial Monitoring Committee to meet Monday morning, followed by the regular OPEC ministerial meeting Monday afternoon.

Russia and the nine other non-OPEC partners in the supply accord will then join the talks Tuesday.

The proceedings may be overshadowed by the G20 summit in Osaka, Japan, just before the OPEC/non-OPEC gathering, where global trade conflicts, US sanctions and energy security will be high on the agenda.

Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman are scheduled to meet at the G20 summit and could announce an agreement on OPEC/non-OPEC production policy ahead of the Vienna meeting.

US President Donald Trump, who has pressured Saudi Arabia to keep oil prices low, will also be in Osaka.

"We should wait, including for meetings during the G20," Russian energy minister Alexander Novak said Tuesday, declining to commit to a rollover. "We will see what issues will be discussed there, how the economy and the market situation will develop. We will have a clearer idea of the situation by the OPEC/non-OPEC meeting."

OIL SECURITY AT STAKE

Increasingly messy geopolitics may, however, color the meeting, given the escalation in attacks in the Middle East that have raised concerns about oil supply security.

Saudi Arabia and the US have accused Iran of being behind the incidents that have targeted six oil tankers and a key Saudi oil pipeline.

Iran has denied involvement but has repeatedly threatened to shut down traffic through the narrow Strait of Hormuz if its oil exports are further choked off by US sanctions, which have already caused Iran's oil output to fall almost 1.4 million b/d -- more than one third -- in the span of a year, according to Platts' monthly survey of OPEC production.

Iranian officials have complained that Saudi Arabia and its close ally the UAE were destroying OPEC comity by backing the US in its sanctions.

Expect some finger-pointing and harsh rhetoric at the OPEC meeting, even with Saudi Arabia and Iran likely aligned on extending the production cut agreement, said Helima Croft, global head of commodity strategy with RBC Capital.

Saudi Arabia has been among the most outspoken OPEC members in advocating for a cut extension, and Iran's primary interest is in protecting its threatened market share. "While an extension of the OPEC agreement is looking fairly straightforward, the mounting tensions between Iran and its regional rivals will likely be on full display in Vienna," Croft said. Also on the agenda for OPEC ministers in Vienna is the potential reappointment of its secretary general, Mohammed Barkindo, whose three-year term is expiring. Barkindo has shepherded the producer group through its output cuts and engagement with non-OPEC partners, and is interested in serving another term, which is unlikely to meet significant opposition, three OPEC sources told S&P Global Platts.

Click here to see full-size infographic

OPEC meets in the shadow of Trump's showdown with Iran

-- Herman Wang, herman.wang@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com