OPEC Inaction Analysis – Politics and Misc – 5/18/16

The reasons behind the Saudi Arabia keeping OPEC policy aimed at minimal market interference are not all economic. Recently removed oil minister, Mr. al-Naimi set a policy of seperation between politics and oil. Such a policy deeply conflicts with the vision of Crown Prince Mohammed bin Salman, now seen as the power behind the Saudi throne. The Prince appears much more open to using oil policy as a tool in conflicts with regional rival Iran as he reportedly made a last minute call to Saudi officials in Doha that ultimately scuttled the expected freeze agreement. His demand that any agreement on a production freeze include a similar commitment from Iran, which it openly opposed from the outset as it is trying to recover from recently lifted sanctions, illustrates his confrontational nature when it comes to the rival nation and willingness to use oil policy for political ends. Such actions only increase internal discord and inaction by OPEC as a whole.

Saudi Arabia and Iran’s adversarial relationship in the marketplace and in regional proxy battles contributes greatly to OPEC inaction. The two largest producers of the group, neither feels obligated to comply with obviously self-serving demands of the other, so Iran is likely to continue its drive to increase oil exports. The newly released IEA Oil Market Report  (OMR), showed a 300,000 barrel a day jump in Iranian oil output in April, while Saudi output remains steady near 10.2 mb/d. The two countries compete for market share in Europe and Asia, and both are in need of cash to fund their competition for influence over neighboring regions in the Middle East.

Still, the global oil surplus in the first half of this year will probably be smaller than previously estimated because of robust demand in India and other emerging nations, according to the IEA. Although a rebound to prices above $50 a barrel is unlikely since stockpiles are full to bursting with crude oil and refined products, the global supply surplus of oil is expected to fall substantially by the end of the year. The report also had OPEC reaching its highest output since 2008 as Iran increased production.

An end to the glut would validate the OPEC/Saudi Arabia policy of letting market forces re-balance world markets, a move pushed by the Saudi Crown Prince who pressed his country’s oil ministry to back out of a freeze deal at Doha and who publicly plans for his country to move beyond oil.

OPEC itself has kept forecasts for global oil supply and demand unchanged before members meet to review the market. Oil prices are up 75% from February lows as U.S. shale driller bankruptcies have increased, making it unlikely that the group will change tactics. OPEC members have announced no plans ahead of the June 2 meeting so the group is likely to continue with its strategy of inaction.

“We shouldn’t expect any freeze and definitely not any cut because OPEC sees things are improving from a fundamental point of view,” said Torbjoern Kjus, an analyst at DNB ASA in Oslo. “The structural decline based on lower investment is starting to show up in numbers for non-OPEC. That damage is done, even if prices recover in the second half.”

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