Vienna is expected to be the focus next week, as the buzz around the much anticipated Opec meeting gets louder. The US President Trump minced no words on Twitter, in telling the world how he feels about Opec’s role. He once again blamed Opec for the high oil prices, and in a warning tone, singed off with “not good”.
There is no denying Opec remains a potent force and a driving force when it comes to determining the market price. Add Russia to the equation and it becomes a powerhouse, and the Americans certainly cannot be too happy about it. That said, USA’s own shale oil industry has banked a lot on Opec’s decisions and the resultant increase in the past six to eight months shows – how quick the shale market has caught up with production. But this is also why the USA would rather prefer a more stable price – as any massive fluctuation on the downside – wipes off the shale production in a go – and takes time and significant investment to bring it back in.
Saudi Arabia on the other hand, has been publicly keen on fetching higher prices for the historic Aramco deal. Some say $88/bbl earlier envisaged by Saudis may not happen soon, but the indication of revamping up production after the Opec meeting must not be taken as a step back by the Saudis.
The fact remains that production from Iran stands to suffer a great deal after the recently imposed US sanctions – and here is why the Saudi indication of ending the production freeze deal could make sense, which some say is a favour returned to Trump.
Russia has its own reasons, as it was facing tremendous pressure on account of losing market share to shale producers. Keep in mind the International Energy Agency, in its latest monthly report has warned of a potential supply gap, in a highly likely scenario of a complete collapse of Venezuela production, and a significant cut in Iran’s.
And that could mean continued pressure on supply, even if Opec and Russia decide to pump more. The Opec meeting may result in end of the production freeze deal, but it may not necessarily lead to a proportionate reduction in prices.
The IEA has also signaled that increased production from Opec and Russia, would also mean, it will be a big drag on global spare capacity. Saudis hold nearly 60 percent of the global spare capacity, and stand to lose more than half of it, it oil production is ramped up. In simpler terms, a reduced spare capacity adds more risk premium to oil prices, and prices can shoot massively in case of a natural disaster, or a geopolitical incident. From how it is panning out, oil prices may stay north.
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