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Trading  | June 20, 2018

Ahead of Friday’s OPEC meeting in which the oil producing cartel and Russia will most likely hike production for the first time in 2 years, various numbers are being thrown around, anywhere between 0 – which is how much additional oil Iran and Venezuela want to be produced – and 1.5 million barrels per day, which was the output increase goal of Russia as recently as Tuesday.

However, just like no production increase is impossible, especially with the pressure Trump is weighing on his new best friends, Saudi Arabia, so the upper end of the production range, or 1.5mmb/d. is also unlikely as Energy Aspects analyst Amrita Sen said says in interview on Bloomberg Television from Vienna. Predicting that Vienna’s session on Friday will be “one of the most political meetings we’ve seen in years, if not decades”

Sen also said that Russia’s proposal to increase output by 1.5mb/d is “non-starter,” “not even on the table for discussion” because crude prices would drop – sharply  – if OPEC+ agree to raise output more than 600kb/d.

As a result the London-based analyst – who was already assuming 500k b/d output increase in 2H from Gulf Arab producers and Russia, even before this week’s OPEC summit was floated – forecasts that producers will likely add 300k to 600k b/d as Saudi Arabia, Russia, Kuwait, U.A.E. all want to boost output.

Which brings us to the three possible outcomes from Friday’s meeting as laid out by energy consultancy Wood Mackenzie:

  • The most likely option to get wider support, is if OPEC agrees to boost production by 500kb/d, with Russia adding 100kb/d in 2H, for a total of 600kb/d.
  • The second possible option is for OPEC to keep current agreement to cut output, leading to a “small” implied draw in stockpiles in 3Q followed by a build in 4Q which would lead to lower prices heading into 2019 and oversupply for year.
  • The third option sees OPEC increasing output by 1m b/d, and Russia by 300k b/d, which would add 900k b/d on avg to inventories in 2H18 and 1.8m b/d in 2019, and likely much lower oil prices in the near-term.

The most likely option, one around 600,000 is also what the FT reported this afternoon saying that “a senior Opec figure suggested that Saudi Arabia was targeting a collective production increase of 600,000 to 800,00 barrels a day.” The range is a slight increase to the one floated earlier, and which called for a production increase of 300-600kb/d.

The target, which it proposes would be shared proportionally between all members of the so-called Opec+ group that are capable of raising output, has not yet been finalised but is forming the basis of discussions with other countries. The kingdom had earlier briefed that it was looking for a rise of between 300,000 and 600,000 barrels.

However, as reported previously, Iran – which continues to ignore the reality of a world in which it is sanctioned, and which will trim Iranian oil exports by up to 1mmb/d – is resisting the Saudi-led move which would send oil prices lower, putting the two Middle East rivals on a collision course ahead of Friday’s summit.

Bijan Zanganeh said he did not believe an agreement to relax production cuts — first agreed nearly two years ago amid a global supply glut — could be reached at the oil cartel’s meeting, insisting the group was not an “American organisation”.

“Opec is not an organisation to receive its instruction from President Trump,” Mr Zanganeh said on arriving in Vienna for the talks.

Or maybe it is. In a separate report from CNN, Zanganeh said that OPEC members were discussing going back to 100% compliance, and added that Iran may agree to a supply increase without the need for new agreement. Specifically Iran is envisioning a world in which there is no more “overdelivering on cuts” – largely as a result of the collapse of Venezuela’s oil infrastructure which has resulted in Caracas producing far less than even its production cut quota  – with analysts estimating that if those who have cut more than required scaled back to 100% compliance (instead of the 100%+ where it is now due to basket cases like Maduro) it would add a million-odd barrels a day to output.

Of course, at the end of the day, OPEC is really another name for Saudi Arabia, and whatever Riyadh wants, Riyadh gets. And on Wednesday, the Saudi energy minister, Khalid al-Falih, said that while they were still in consultations with other members, more countries were backing the idea that it was “time for us to change course”.

“The market demands more [oil] in the second half. The exact amount, the timing, the manner . . . we have a couple of days to discuss.

“I am confident that at the end of the day reason will prevail and we will do the right thing.”

In short, OPEC will most likely agree to boost production by around 800kb/d, with Iran kicking and screaming but ultimately agreeing, with significant risk that the final number could be above 1mm barrels per day.

And just in case the number ends up being “far higher”, Saudi Aramco, which would love a $100+ oil price ahead of its IPO, said that it has at least 2 million b/d in additional output capacity if required.

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