Jeddah — The specter of war and risks to global oil supply security will hang over a key OPEC/non-OPEC monitoring committee this weekend, as ministers gather in Saudi Arabia to debate how much oil to pump in the months ahead.
Many analysts -- and indeed OPEC itself -- forecast a tight market ahead, with the US ratcheting up the enforcement of sanctions on Iran and the summer driving season just around the corner.
But Saudi Arabia, OPEC's largest crude producer by far and holder of the vast majority of the world's spare output capacity, has so far held off US pressure to pump more barrels to offset the expiry of Iran sanctions waivers earlier this month, as it seeks higher prices.
This week's attacks on a major Saudi oil pipeline -- which Saudi Arabia has blamed on Iran and its Yemeni Houthi allies -- along with suspected "sabotage" on four ships off the eastern coast of the UAE, will no doubt color the deliberations.
Iran will not be sending a representative to the meeting, but its threats to disrupt trade through the Strait of Hormuz if Saudi Arabia, the UAE and other OPEC producers encroach on its sanctions-hit oil market share will be top of mind.
Venezuela, another member suffering under US sanctions, does sit on the committee and will likely make its voice heard.
"The next OPEC meeting is...going to be very complicated as we don't see how Iran and Venezuela will vote in favor of a supply increase by Saudi Arabia and the UAE in order to replace their restricted exports due to US sanctions," said Olivier Jakob, an analyst with consultancy Petromatrix.
The meeting of the Joint Ministerial Monitoring Committee, co-chaired by Saudi Arabia and Russia, is ostensibly about assessing market conditions and assessing compliance with production quotas, which are set to expire at the end of June.
But these roughly bimonthly meetings typically serve as a preamble to OPEC's formal semiannual ministerial summits, allowing Saudi Arabia and Russia, the main non-OPEC partner in the coalition's supply cut agreement, to align their positions.
The next regular OPEC meeting is scheduled for June 25 in Vienna, with Russia and the nine other non-OPEC allies joining talks a day later.
In Jeddah, a technical committee of delegates will meet Friday to examine market fundamentals. The JMMC itself will meet Sunday.
DECISIONS, DECISIONS, DECISIONS
The JMMC meeting will occur at 4 pm Riyadh time (1300 GMT) with a press conference scheduled at 9 pm.
These meets are occurring during the Muslim holy month of Ramadan, so some key proceedings are expected to occur after sundown, with fasting breaks expected.
One delegate, who spoke on condition of anonymity, said he does not expect any decisions on production quotas to be made at the JMMC, but the increasingly tense geopolitics and this past week's attacks in Saudi Arabia and the UAE will certainly be discussed among ministers during bilateral meetings.
Saudi officials have long maintained they would prefer to see the production cut deal, which committed the coalition to 1.2 million b/d in supply reductions, extended through at least the end of the year.
But other members of the coalition are less amenable, with many eager to pump as much as they can to take advantage of oil prices that have already risen more than 35% since the start of the year.
This comes as Iran's crude exports have been kneecapped by US sanctions, which were re-imposed in November. Iranian export volumes have fallen just over 1 million b/d in a year to about 1.3 million b/d in recent months, and S&P Global Analytics forecasts they will continue to fall to below 500,000 b/d in the second half of the year, due to the expiry of the waivers that the US had granted to China, Japan, India and five other countries.
Iranian officials have warned that any moves by other OPEC members to steal their customers would risk tearing apart the organization.
SUPPLY UNCERTAINTIES PERSIST
Due to its production discipline to date, Saudi Arabia can increase output by bout 500,000 b/d from its April level of 9.82 million b/d, as estimated by the latest Platts OPEC survey, and still remain compliant with its 10.31 million b/d quota.
But Saudi production is almost certainly set to inch higher, with peak summer air conditioning demand requiring more crude to be burned in power plants. Platts Analytics forecasts that Saudi domestic crude consumption will peak this year at 481,000 b/d in July, up from an estimated 363,000 b/d in April.
That leaves Saudi Arabia with less of a cushion under its quota to fill any supply gap caused by tighter enforcement of US sanctions on Iran. Venezuela's continued production collapse is also squeezing the heavy crude market, while Libya's instability and Nigeria's vulnerability to infrastructure attacks remain significant supply risks.
If it is to satisfy US President Donald Trump's insistence that oil prices do not spike, Saudi Arabia may very well have to risk OPEC unity - and guard against an escalation of disruptions around the Persian Gulf - by producing above its quota, if the OPEC/non-OPEC supply accord is extended.
"Current very tight market conditions are keeping the risk to oil prices skewed to the upside, but this is a market with many moving and opposing parts, and the picture could change quickly," said Ole Hansen, head of commodity strategy for Saxo Bank.
-- Herman Wang, herman.wang@spglobal.com
-- Edited by Jonathan Fox, newsdesk@spglobal.com