Rising tensions in the Middle East are vying with fears over an escalating trade war between the U.S. and China to determine the course of oil prices in the coming weeks. In the midst of the turmoil, a group of OPEC+ oil ministers are meeting to recommend a course of action for the group over the second half of the year. Their task is not an enviable one.
As the Middle East seems to be slipping closer to another armed conflict, the OPEC+ group’s Joint Ministerial Monitoring Committee meets today in Jeddah, Saudi Arabia. This is the group set up as part of the 2016 OPEC+ agreement to monitor compliance with the output targets and which Iran has accused Saudi Arabia of seeking to use as an alternative to OPEC.
Not surprisingly, Iran’s oil minister is not making the trip to Jeddah. Saudi Arabia has accused its Persian Gulf neighbor of ordering last week’s drone strikes on its East-West pipeline, claimed by Iran-backed Houthis in Yemen. Oil flow along the line, which has the capacity to carry 5 million barrels a day of crude from fields in the east of the kingdom to refineries and export terminals on its Red Sea coast, bypassing the Strait of Hormuz was briefly disrupted. An attack earlier in the week on several oil tankers off the U.A.E. port of Fujairah, has also been linked to Iran. One Saudi newspaper has called for “surgical strikes” against the country.
The toughening of U.S. sanctions on Iran at the start of May is weighing heavily on the country’s oil exports, while the failure of Juan Guaido’s attempt to spark a military uprising against President Nicolas Maduro means that Venezuela’s oil production is likely to continue its seemingly inexorable slide. Involuntary output declines in those two countries have accounted for half of the reduction in total OPEC output since October.
Two of the three major oil forecasting groups – the U.S. Energy Information Administration and OPEC – already see global oil balances in deficit this year. Only the International Energy Agency sees a small build in stockpiles. That creates a difficult decision for the oil ministers.
With Brent crude in the “comfort zone” of $70-75 a barrel, countries like Russia will press for a relaxation of output restraint when the deal comes up for discussion in June. But with U.S. inventories continuing to build and uncertainty over the strength of oil demand growth in the face of a deepening U.S.-China trade war, Saudi Arabia appears to favor extending the deal yet again, setting up a potential conflict between the de-facto leaders of the OPEC+ group.
Saudi Arabia has plenty of room to boost its own production to offset losses from Iran and Venezuela, while still remaining below its agreed target level. That’s because it cut has output much further than it agreed to in the last few months. The same is not true for Russia, or the other Persian Gulf Arab countries that hold spare capacity but are already producing as much as they are permitted. They need higher output targets if they are to continue abiding by the deal.
And then there’s Iran and Venezuela.
Their oil production is in free-fall and likely to drop further due, at least in large part, to U.S. sanctions. The days when they could have expected solidarity from their OPEC partners against an external threat are long gone. While they may rail against certain OPEC countries acting in concert with the U.S. against them, there is little they can do about it.
Neither is willing to leave an organization they helped create and to do so would be an empty gesture in any case. OPEC decisions require unanimity, so they could veto any change in output policy that harms their interests. But they may end up finding that the best they can do is to agree with the Saudis that collective output restraint needs to be maintained.
Tonight’s meeting will decide nothing, but it should provide some clues on how the various camps will line up for June’s gathering. In the meantime, oil prices will continue to be pulled by Middle East geopolitics and U.S.-China economics – and President Donald Trump’s tweets on both.
