How OPEC Committee Meeting Can Affect Prices

How OPEC Committee Meeting Can Affect PricesHow OPEC Committee Meeting Can Affect Prices

A highly-anticipated meeting of oil ministers from the Organization of Petroleum Exporting Countries and some non-OPEC producers on Monday could make or break oil prices that have already tumbled more than 12% year to date.

“As always with OPEC, the most important attendees are Saudi Arabia and Russia,” said Eric Winograd, senior economist at financial services firm AllianceBernstein.

Saudi Arabia and Russia are two of the world’s largest crude producers and oil-exporting giants, Market Watch reported.

“Any sign that either is wavering in its commitment to the [production] quotas would have a large market impact,” said Winograd. The gathering is really just routine for the Joint OPEC-Non-OPEC Ministerial Monitoring Committee, or JMMC—comprised of OPEC members Algeria, Kuwait and Venezuela as well as non-OPEC countries Russia and Oman—which was established late last year.

“The big players will most likely indicate that they will continue to live by the [output-cut] deal because if they don’t at least say that, then the deal falls apart and there could be a drop in prices,” said Winograd. The group of oil ministers is tasked with monitoring the implementation of the agreement that began Jan. 1 between 13 OPEC members and 11 non-OPEC producers to cut output by about 1.8 million barrels a day, in an effort to bring global supplies back to their five-year average.

The JMMC is supposed to analyze and make “recommendations, not decisions”, and not all OPEC members will be in attendance, said James Williams, energy economist at WTRG Economics. He said “the meeting could move the market—more from what is said on the sidelines rather than in the meeting.”

But the meeting comes at a precarious time for the oil market—one that is facing a continuing rise in US production, climbing output from Libya and Nigeria—two OPEC members that are exempt from the output curbs, and Ecuador’s decision to abandon its pledge to limit output.

  Failed Attempts

When some of the world’s largest oil producers came together two months ago, they made a move aimed at boosting prices, stretching the output-cut agreement through March of next year, past its original expiration at the end of June 2017.

The monitoring committee said a month ago that OPEC and non-OPEC compliance with the agreement climbed to 106% in May, dubbing it the “highest conformity ever with their voluntary adjustments in production”.

Oil producers have, in recent months, proven their willingness to abide by the agreement. As prices continue to decline, however, compliance with the agreement has faltered and global supplies edged higher last month.

  Uphill Battle

For OPEC, it has been an uphill battle to balance the oil market’s supply and demand. And rising production in the US is not the only factor to blame.

Growing output from OPEC-members Libya and Nigeria, which do not have output limits under the pact as they attempt to recover production lost to civil unrest, have worked to offset efforts toward market balance.

Kuwait’s oil minister has reportedly said that the two African nations may soon be asked to limit their production. There is also speculation that Saudi Arabia is considering a 1 million-barrel cut to its oil exports to offset the output rise in Libya and Nigeria.

“Libya and Nigerian production will be discussed at this [committee] meeting,” said Thummel. “If production levels from these countries can be sustained, then I would expect the compliance committee will ask them to cap production.”

Libya is expected to offer its output plans at the gathering, according to reports. OPEC-member Ecuador, meanwhile, has said it can no longer afford to curb production.

Michael Lynch, president of president of Strategic Energy & Economic Research, said he believes Monday’s meeting will primarily “focus on exhorting everyone to ‘stay the course’ and argue that the market balance is improving”.

The committee may urge Libya and Nigeria to “moderate” their production, but most likely won’t assign specific numbers to those countries just yet, said Lynch.

Analysts expect to hear a lot of talk from the meeting, but do not expect any concrete moves. After the meeting is done, “the next question on oil traders’ minds is what will OPEC do in March 2018 when the current agreement expires”, said Thummel.


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