Ahead of OPEC meeting, Saudi Arabia moves to stabilize oil prices

Ahead of OPEC meeting, Saudi Arabia moves to stabilize oil prices
Ahead of OPEC meeting, Saudi Arabia moves to stabilize oil prices

Before OPEC's meeting next month, Saudi Arabia moves to stabilize oil prices after world oil prices have recently soared amid many factors; the unrest in Venezuela, the US-China war, the return of American sanctions on Iran, adding to the late attacks on Saudi tankers and pipeline.

Interestingly, the OPEC+ alliance decides, in its meeting nextmonth, how to proceed with their oil supply management policy whether by extendingthe output cut or by decreasing the curbs.

OPEC recognizes that critical uncertainties about global oil supplies,including ongoing trade negotiations, monetary policy developments, andgeopolitical challenges. Noting that much of the uncertainty in global oilmarkets stems from weak prospects for global economic growth and oil demandamid a trade war against China.

Tensions inthe Middle East have risen since Trump's administration puts pressure on Iranand deploys military troops in the region.

OPEC's Two Options for June Meeting

The weighingfactors on the market have brought two options as for OPEC+'s June meetingto the fore—Both of the two options is to reduce the oil supplies; the first optionis to eliminate excessive compliance with the agreed reductions, which willincrease production by 0.8 million barrels per day, while the other option isto mitigate the agreed reductions to 0.9 million barrels per day.

Saudi Arabia thathas shouldered OPEC's cuts, sees the possible extension to the production curbsin the second half of 2019, agreed by OPEC and the non-member group, as themain option discussed at the ministry committee meeting held in May.

"In the second half of this year, we would prefer to maintain production management, to keep stocks going down gradually and quietly, until they reach normal levels," Energy Minister, Khalid Al-Faleh declared to a news conference after the committee's meeting.

Russia andother non-member producers, have agreed to cut production by 1.2 million barrelsper day as of Jan. 1 for six months, a deal aimed at halting stockpiles andboosting prices. OPEC's agreed quota of cuts is 800,000 barrels a day, but itsactual reduction is much greater because of production losses in Iran andVenezuela.

OPEC sourcessaid that Saudi Arabia doesn't recommend increasing the output quickly now,with the price stands at around $70 a barrel, and Saudi Arabia fears a collapsein prices and an increase in inventory. Therefore, Al-Faleh said that if adecision is made at June meeting to reduce production, Saudi Arabia will remainwithin those curbs. Noting that the kingdom's oil production in May and June isset to be 9.8 million barrels per day.

The OPEC+alliance may decide to keep reducing oil supplies until the end of the year, theWall Street Journal said, as the organization fears a sharp drop in prices ifcuts are reversed over the next two months by the largest producers.

Here, OPECmust ensure a balance between keeping the oil market stabilized with priceshigh enough to meet the budget needs of member states and keeping Moscowsatisfied so Russia goes on OPEC+ agreement.

Al-Faleh saidthat demand for Saudi crude rose in Asia while falling in the United States andno one had an idea what Iran was producing or exporting.

It seems thatthere are two options to extend the reduction of production: the first is tomake everyone comply with 100% to the production targets set in the Decemberagreement, which called for the removal of 1.2 million barrels per day of the globalsupply, and the second is to allow OPEC members to implement a different levelof cuts by applying the average of a monthly production rate for one month fromSeptember to December 2018. While trying to strictly comply with December'sgoals would eventually reduce global stocks in the second half of this year,the other option would eventually increase the average five-year global supply,the Wall Street Journal reported.

 Oil-producing major countriestend to maintain production curbs in 2019, defying Trump's calls to open tapsand reduce the cost of crude oil. OPEC is trying to maintain the balance ofsupply and demand and stabilize prices by pumping less oil, which helped toincrease oil prices by about $ 20 a barrel this year.

If OPEC follows the path of curbing production when producers meet in June,it will be the second time in six months that the group has ignored Trump'scalls, who urged the current production cuts last fall.

As long as production curbs remain, WTI crude oil prices are likely toremain near its highest level in six months, around $63 a barrel.

Although Trump focuses on the weak economy that requires a reduction inworld oil prices, his foreign policy is putting upward pressure on oil futures,which in turn increases gas costs.

Washington has imposed restrictions on world oil supplies by imposingsanctions on Iran and Venezuela, members of OPEC. Trump wants the rest of OPECproducers, particularly Saudi Arabia and the United Arab Emirates, tocompensate for these losses by raising the output.

Washington has imposed restrictions on world oil supplies by imposingsanctions on Iran and Venezuela, members of OPEC. Trump wants the rest of OPECproducers, particularly Saudi Arabia and the United Arab Emirates, tocompensate for these losses by injecting more oil.

In contrast, Saudi Arabia and the UAE have not committed to increaseproduction, while Al-Faleh has warned that global crude stocks are rising;threatening to plunge the world into oil and cause price collapse.

"In part, we admit the concerns on unrest, sanctions, and supplycuts," Al-Faleh added, "At the other end of the spectrum, we see high oilstocks around the world; which means we have to cut supplies in the comingweeks and months."

Last April, Saudi Arabia pumped only 9.7 million bpd, although it wasallowed to produce 10.3 million bpd under the OPEC+ agreement. Thismeans that Saudi Arabia can add about 570,000 bpd to the market even if thealliance is committed to production curbs. The lower production in Iran andVenezuela is the main reason for OPEC+ production cuts more than theagreed limit.

Sources to Reuters said that OPEC+ also consider a slight easingof total reductions in the output, reducing it from 1.2 million bpd to about 900thousand bpd. This could add 300,000 bpd to the market, which in turn willaffect prices and push them to further downward trend as global oil stocks rise.

However, Al-Faleh said that production in May and June will remain at the current level of 9.8 million bpd. Al-Faleh also added that regardless of what OPEC decides next month, production in July will not exceed the limit of Saudi Arabia in a deal of 10.3 million bpd.

Doubts

Observers believe that OPEC+ will not succeed in curbing allproducers who did not meet production quotas for the month of December, such asIraq, Russia.

The Russian Minister of Energy, Alexander Novak, who spoke after the meetingof the Joint Ministry Committee of OPEC on May 19 that there is also anincrease in production on the table.

But this continuity in reducing production can depend on different rangeson how the situation evolves by this time and what market supply and demandexpectations are. If it turns out that there will be a shortage in the market,we will be ready to consider the options associated with a possible increase inproduction.

Conflicting messages underline the uncertainty in the global market. Ifministers do not agree to the extension next month, production cuts that endedthe worst oil industry slowdown in a decade, will end. Yet their decision isclouded by the impact of US sanctions on Iran and the threat of Trump's tradewar against China.

Saudi Arabia has so far tried to strike a balance between its need forhigher revenues to fund government spending and its strategy to bridge anysupply gap caused by Iran or Venezuela. What Saudi Arabia might choose with itsabundant capacity, would be the decisive factor for the market in the comingmonths.

Scenarios

In the light of the upcoming meeting, there are some potential scenariosfor future oil prices, if OPEC+ shouldered the cuts, Brentprices could rise by $5 a barrel in the second half of 2019 compared to thefirst half; to exceed $77 a barrel later this year.

If they re-add supplies to the market by eliminating excessive compliance,Brent crude may remain at $70. If they announce the end of the agreement,prices may fall to $60.

A negative economic outlook, coupled with the exit from the OPEC+agreement, could lead to a drop in prices to $50. In the end, there is a fairlylarge gap in expectations among OPEC members themselves.

The bullish situation is based on cutting the supplies and OPEC +commitments to cut them, while a lower and more volatile scenario is seenwithin the OPEC+ alliance, forcing it to come out prematurely fromthe deal. Adding to the downside, which is the possibility of an economicslowdown.

The continued shift in US trade policy may become a source of growing concern for oil prices. The IMF insists that consumers in the United States and China are the main losers of trade tensions. The IMF also said that failure to resolve the trade war could lead to further escalation in other areas, such as the automobile industry in many countries; negatively impacting the margins of emerging market bonds and currencies, and then slowing down investment and trade.

Recent price action in crude oil increases the risk of a larger correctionas the price of oil stabilizes within the monthly opening, with the downside isbeing targeted, prices have maintained the upward trend started since earlythis year.

Crude oil came out of the monthly opening after a failed attempt to closeabove $62.70 to $63.70, moving below $57.40.

OPEC-led supply cuts have been the main driver of price increases thisyear. Therefore, the potential extension of production curbs can be thecatalyst that triggers the upward movement of prices.

Prices are likely to continue to be supported by OPEC-led supply cuts strategy, but gains will be limited because of rising US stocks. On the upward side, there are expectations that Saudi Arabia will not accept increasing the production given the recent decline in prices.

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