Rivalry can leave OPEC hamstrung

Severe controversies between the cartel members can lead to a standstill and/or trouble at what looks like going to be one of the more interesting but highly turbulent OPEC meetings this Thursday (14 June).

Internal cooperation between the cartel members is an absolute necessity to be able to control the market and work as a swing producer. After last year’s disastrous June meeting where the OPEC members failed to reach an agreement, the cartel managed to present a unified agreement to regain confidence in the market in December. OPEC decided to maintain the current production level of around 30m b/d, and for the first time in 21 years Iraq was again included in the cartel’s targeted production level.

This can be a tough call as fierce disputes have intensified between the two biggest cartel producers, Saudi Arabia and Iran. The controversies are many:

• Total OPEC production in April 31.85 mb/d, 6% more than the cartels production ceiling from December 2011. Saudi Arabia, the cartel’s de facto leader, has flooded the market with oil to meet the seasonal upswing in demand in Q3 and to compensate for the lost Iranian barrels when the US/EU sanctions embargo will go into effect at the end of June and for non-OPEC production disturbances.
• Saudi Arabia is pumping oil at record levels to bring oil prices down to the cartels’ unofficial price target at USD 100/barrel, a level the oil producers sees as a “fair price” in this fragile period for the world economy and high oil prices may trigger further demand destruction.
• Both Riyadh and Teheran are competing together with Bagdad and Quito for the position as new OPEC secretary-general.

Clearly Iran dislikes that its fellow cartel member’s is flooding the market with oil both because Iran is afraid Saudi Arabia is trying to increase its market share at the expense of shut-in Iranian production following the sanctions and because Iran needs an oil price at just below USD 120/barrel to balance its fiscal budget. Saudi Arabia needs an oil price around USD 75-80/barrel.

                                          Fiscal breakeven prices for 6 OPEC members

                                                          Source: IMF

Iran and Iraq signaled last week that they will adopt a unified position on OPEC’s oil production. They are likely to call for stricter compliance among the cartel members to stick to the current production target at 30 mb/d and push Saudi Arabia to scale back its record output. They are afraid that pumping too much oil to the market can lead to a serious drop in oil prices and create serious supply/demand imbalances.

We don’t expect to see any change in the production quotas at this meeting. A cut in quotas will send negative signals to the market at a time when the world economy is struggling to regain growth, while an increase is out of the question. In addition, we are afraid that internal rivalry and fierce debates can end in failure to agree upon one candidate for the secretary-general position at a time when the cartel needs to signal a strong and united stand. We are afraid that severe controversies between the cartel members can lead to a standstill, but we don’t expect the turbulence will cause any major movement in the oil price. We are more worried about effects the meeting between Iran and P5+1 in Moscow 18-19 June will have on prices as last week’s apparent collapse of talks between Iran and the IAEA will add to the gloomy prospect that there will now be no progress on the more wide-ranging international negotiations over the future of the Iranian nuclear programme. A failure to move forward with the negotiations may push up the oil risk premium again.

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