News ID: 217472
Published: 0928 GMT June 29, 2018

OPEC decision and mixed oil market reaction

OPEC decision and mixed oil market reaction

By Heshmatollah Razavi*

Since last Friday, when OPEC held its 174th ministerial meeting in Vienna, the oil market has shown a mixed reaction to the OPEC agreement. On Friday, oil prices went up immediately after OPEC released its communiqué. OPEC had announced: "The Conference hereby decided that countries will strive to adhere to the overall conformity level of OPEC-12, down to 100 percent, as of July 1, 2018 for the remaining duration of the above mentioned resolution."

However, on Monday oil prices went down, mainly due to expectations that OPEC will increase oil production by as much as one million barrels per day.

Also, on Tuesday and Wednesday the market witnessed ups and downs which was the result of Saudi Arabian officials' remarks on raising oil production to 11 million barrels from July on the one hand and the US pressure on India and other countries to halt or reduce oil imports from Iran on the other hand.

It seems that OPEC decision has confused the markets that are not sure about the physical number of oil barrels which will find their way to the market.

This mixed reaction is reasonable since OPEC has made a decision which is not clear and could be interpreted differently as is the case when you consider Iran and Saudi Arabia oil ministers' remarks.

Before the 174th ministerial meeting of OPEC in Vienna on June 22, it was not clear what decision OPEC might take. There were two different views in OPEC. On the one hand, Iran's Oil Minister Bijan Namdar Zanganeh, believed that OPEC should not increase oil production. He was reasoning that the rise in oil prices to nearly $80 in May was the result of a political decision made by the US president, Donald Trump, who announced US withdrawal from Joint Comprehensive Plan of Action (JCPOA), the nuclear deal between Iran and five permanent members of the UN Security Council plus Germany, and renewed sanctions against Tehran.

Accordingly, he argued, as Shana news website affiliated to Iran's Oil Ministry reported, higher oil prices are the result of a political decision and not the actual oil shortage in the market. In other words, geopolitics factors were responsible for higher oil prices, not the fundamentals.

Zanganeh said that if there is imbalance in the market, it is the result of US actions against Iran and Venezuela and consequently Washington should revise its earlier decisions to restore stability to the market.

In the meantime, Saudi Arabia, Iran's archrival in the Middle East, including in Yemen, Iraq, Lebanon and Syria conflicts, as was expected, had a different view towards oil market developments; arguing that OPEC should increase oil supply to meet oil consuming countries' needs.

Saudi Arabia's Oil Minister Khalid al-Falih, said it's 'inevitable' that OPEC and its allies will agree to boost oil output gradually, giving the most definitive signal yet that OPEC will reduce prices for consumers.

Non-OPEC oil producing countries, including Russia, as the largest oil producer in the world, had views similar to that of Saudi Arabia on the need to boost oil production — a view that was criticized by Iran since it implicitly meant that the country plans to replace Iran's oil in the market following the renewal of US sanctions.

Anyway, Iran and Saudi Arabia decided not to repeat June 2011 meeting results in which their differing views on the role of geopolitics and fundamentals in higher oil prices left the organization without any decision and the communiqué about oil market developments and each OPEC country decided to go its own way.

Contrary to June 2011, this time, Iran and Saudi Arabia, decided to reach a compromise but each had its own interpretation of the deal and its impacts on actual oil production.

After the end of the OPEC ministerial meeting on Friday, Iran's oil minister announced that OPEC members pledged to remain committed to their production cuts under the previous OPEC resolutions. He is right since OPEC renewed its commitment to earlier agreements where it said: "The Conference hereby decided that countries will strive to adhere to the overall conformity level of OPEC-12, down to 100 percent, as of July 1, 2018 for the remaining duration of the above-mentioned resolution and for the JMMC to monitor and report back to the President of the Conference."

On the other hand, the Saudi Arabia's oil minister said that under the agreement, oil production will go up by nearly one million barrels per day. He is also right, because OPEC overall conformity to cutting oil production exceeded 150 percent in May and returning to 100 percent overall conformity implies that each of OPEC members, particularly Saudi Arabia and the UAE with spare capacity, along with Russia outside OPEC, could produce more and fill the void of decreasing oil production from other members — a view that OPEC and Non-OPEC statement emphasized on it in its meeting in Vienna on Saturday.

This interpretable and not much clear decision in view of its impact on actual oil production has confused the oil market and that since last Friday, it is not clear what the result of OPEC agreement would be given that the number of oil barrels will be available in the market physically.

It is not clear how many barrels Saudi Arabia will be able to send to the market. Also it is not clear how many barrels of oil will be removed from the oil market due to sanctions against Iran. What will be the oil production situation in Venezuela? How many additional barrels will be sent to the market by Russia? What is the future of oil production outlook in Libya and its impact on oil exports? What will be the impact of trade wars on oil demand? And so on.

Also, the stance of major oil consuming countries with regard to the recent OPEC decision is not clear. Before the OPEC meeting, India and China had requested the organization to increase oil supply. Are they satisfied with one hundred percent conformity and its implicit meaning for raising oil supply or they expected OPEC to do more after removing oil glut from the market over the one and half years of cuts?

The US president, similarly, said on social media: "Hope OPEC will increase output substantially. Need to keep prices down!"

These ambiguities prevent the market from having a relatively accurate estimate of the additional number of barrels that will be available in the market after July.

Generally speaking, as far as OPEC decision is concerned, it should be said that its impact on the physical oil market is not clear enough and that is why there has been mixed reactions and ups and downs in the market.


* Heshmatollah Razavi is an Iranian journalist.

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