OPEC is about to make a major oil market decision. Here’s how next week’s meeting could end

CNBC

  • OPEC, Russia and other producers are widely expected to begin easing their deal to limit output at a meeting in Vienna next week.
  • The gathering is shaping up to be a contentious event, with lines drawn between countries that can benefit from an output boost and those with little to gain.
  • Despite the discord, analysts think OPEC will reach a deal to moderately raise output over several months, with an option to hike further.
Khalid Bin Abdulaziz Al-Falih, Saudi Arabia's energy minister and president of OPEC, speaks as Alexander Novak, Russia's energy minister, left, listens during a news conference following the 172nd Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Thursday, May 25, 2017.

Akos Stiller | Bloomberg | Getty Images
Khalid Bin Abdulaziz Al-Falih, Saudi Arabia’s energy minister and president of OPEC, speaks as Alexander Novak, Russia’s energy minister, left, listens during a news conference following the 172nd Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Thursday, May 25, 2017.

A meeting of the world’s biggest oil producers is shaping up to be a contentious event, but analysts think the fractious group will reach consensus on their historic agreement to manage the crude market.

OPEC and other exporters including Russia appear poised to ease voluntary production limits, which have helped shrink a global oil glut since they went into effect in January 2017. The deal isn’t set to expire until the end of the year, but rising prices fueled largely by geopolitical risks have forced the producers to consider their exit strategy.

The agreement calls on OPEC and other producers to keep 1.8 million barrels a day off the market, but they’ve actually been cutting deeper than that.

OPEC meetings are closely watched because the producer group pumps about 40 percent of the world’s oil, so its policy decisions can have major implications across the energy mix. President Donald Trump, perhaps wary of the average U.S. gasoline price hovering near $3 a gallon, has recently blamed OPEC for oil prices, which recently hit 3½-year highs.

Next week’s meeting is also thornier than past gatherings because OPEC’s current production cuts are not limited to the 14-nation cartel. Russia and several other producers have also been throttling back output, and top OPEC producer Saudi Arabia needs to keep the young alliance together, or its ability to manage the market would be diminished.

Hadley Gamble previews the upcoming OPEC meeting

Hadley Gamble previews the upcoming OPEC meeting  

The Saudis will have to consider their partnership with Russia, their relationship with the United States, and simmering tensions with Iran, OPEC’s third-biggest producer and Riyadh’s chief regional rival.

“The decisions that are going to be made in Vienna are going to be more geopolitical this time than normal,” said Dan Yergin, vice chairman of IHS Markit and a Pulitzer Prize-winning chronicler of the petroleum industry.

OPEC tensions rise

Heading into the meeting, a rift has opened among producers with competing interests, raising fears of a repeat of OPEC’s June 2011 meeting, when members left Vienna without agreeing on a shared output policy.

Saudi Arabia and Russia, in particular, have spare capacity and could capture market share by pumping more. Both have expressed support for hiking output.

However, many producers are tapped out and would prefer to hold back supply, which supports prices. Those nations include Venezuela, where output has cratered amid a prolonged economic crisis, and Iran, which is facing renewed U.S. sanctions aimed at cutting off its oil exports.

But they also include Iraq, OPEC’s second-biggest producer. On Monday, the country’s oil minister, Jabbar al-Luaibi, said hiking output could “damage the international markets” and warned unilateral efforts by some members to change the policy might violate the deal.

Luaibi appeared to be responding to reports that Washington asked Saudi Arabia to fill the gap left by a drop in Iranian exports before Trump abandoned the Iran nuclear deal and slapped wide-ranging sanctions on the country.

Yergin said he believes the Saudis would back a policy that keeps international benchmark Brent crude oil prices in the $75-$85 per barrel range, which would support their objectives, including maintaining close ties with the Trump administration.

“They really wanted to see the U.S. withdraw from the Iranian deal, and that means less Iranian oil … so you have to put more oil into the market,” he told CNBC on Wednesday.

Deal remains likely

The public bickering could continue as members aim to negotiate the best possible deal for their country. But despite the discord, analysts think the group will nevertheless reach a deal to begin easing the production caps — and any increase will likely be relatively limited and gradual.

Ed Morse, Citigroup’s head of global commodities research, told CNBC that the Saudis, along with Kuwait and the United Arab Emirates, will likely push for a 500,000 barrel per day hike, leaving another half a million barrel increase until a future review of the market, perhaps in September.

That aligns with the view at RBC Capital Markets, where the firm’s global head of commodity strategy, Helima Croft, also sees OPEC erring on the side of caution with a 500,000 bpd bump. She thinks the cartel will signal a strong willingness to take further action, but she remains wary of tensions ahead of the meeting.

The OPEC boost 'is going to come' as the market is very tight: Expert

OPEC may boost production as the oil market is very tight: Expert  

“Nonetheless, we could envision a scenario where the meeting proves to be so antagonistic because of deep divisions over production and sanctions that they fail to reach a consensus, leaving big producers like Saudi Arabia and Russia to act on their own,” RBC said in a research note.

Michael Cohen, head of energy markets research at Barclays, said that would push oil prices into the $80-$85 range, but he thinks the scenario is unlikely. He forecasts OPEC will increase output by 700,000 to 800,000 bpd through the end of the year. If that happens, Barclays would stick to its view that Brent will average $70 a barrel this year and $65 next year.

Francisco Blanch, Bank of America Merrill Lynch’s head of global commodities research, sees Russia, Saudi Arabia, UAE and Kuwait gradually increasing output by about 200,000 bpd each quarter, eventually adding 1.2 million bpd by the end of next year. In his view, the producers will make the adjustments based on oil market data to prevent a price spike.

“If the cartel aggressively lifts output over the next six months, balances will quickly shift into a surplus, pushing prices lower,” Merrill Lynch said in a research note. “Yet the uncertainty around Iran and Venezuela also creates a difficult path ahead, as it opens the door to multiple OPEC+ responses.”

Oil edges up on cautious optimism over Trump, Kim summit in Singapore

Oil edges up on cautious

optimism over Trump, Kim

summit in Singapore

  • Oil prices edged up along with global markets on Tuesday.
  • Trump and Kim started a one-day summit with the goal to narrow differences over how to end a nuclear standoff on the Korean peninsula.
  • Traders also said they were reluctant to take on large new positions ahead of a meeting between OPEC and some of its allies.

Oil

Lucy Nicholson | Reuters

Oil prices edged up along with global markets on Tuesday on cautious optimism over the outcome of a summit between U.S. President Donald Trump and North Korean leader Kim Jong Un in Singapore.

But movements in crude markets were limited as traders said they were reluctant to take on large new positions ahead of a meeting between producer cartel OPEC and some of its allies on June 22.

Brent crude futures were trading at $76.56 per barrel at 0201, up 10 cents from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $66.24 a barrel, up 14 cents from their last settlement.

Crude has been supported by healthy demand and voluntary production cuts led by the Organization of the Petroleum Exporting Countries (OPEC), but analysts said oil markets were also currently heavily driven by public policy events and statements.

Trump and Kim on Tuesday started a one-day summit in Singaporewith the goal to narrow differences over how to end a nuclear standoff on the Korean peninsula.

“This week is all about global developments … And today marks the potentially momentous meeting between Donald Trump and North Korean leader Kim Jong-Un in Singapore,” said Shannon Rivkin, investment director at Australia’s Rivkin Securities.

Global markets edged up as the highly anticipated U.S.-Korea summit got underway in Singapore amid expressions of goodwill.

“Any positive outcome could be good news for markets,” Rivkin added.

In oil market fundamentals, however, not all things point to higher prices, with output from the three biggest producers, Russia, the United States and Saudi Arabia on the rise.

Russian production has reportedly climbed from below 11 million barrels per day (bpd) to 11.1 million bpd in early June.

In the United States, output has risen by almost a third in the last two years, to a U.S. record of 10.8 million bpd.

“The deluge of U.S. crude production continues to hold the top-side in check,” said Stephen Innes, head of trading at futures brokerage OANDA.

Now, top exporter Saudi Arabia – which has so far led OPEC’s efforts to withhold supplies – is also showing signs of upping production.

Saudi Arabia has told OPEC that it raised oil output to a little more than 10 million bpd in May, up from 9.9 million bpd in April.

“This fits with the theory that the Saudis and Russians are subtly moving toward a change to the agreement at this month’s meeting,” McKenna said.

OPEC, together with some non-OPEC producers including Russia, started withholding output in 2017 to end a global supply overhang and prop up prices.

OPEC and its partners are due to meet on June 22 at the cartel’s headquarters in Vienna, Austria, to discuss policy.

“Expect more of the same whippy markets driven by rumors and innuendo ahead of June 22 Vienna OPEC meeting,” Innes said.

Trump’s sanctions on Iran may be creating an oil trading boom — in China

CNBC

  • Trade in Chinese yuan-denominated crude oil futures has jumped since President Donald Trump pulled the U.S. out of the Iran nuclear deal.
  • There is speculation that restrictions on Iranian oil sales and the lack of access to dollar financing will spur demand for the Shanghai-listed derivatives.

A clerk counts stacks of Chinese yuan at a bank in Beijing, China.

Getty Images
A clerk counts stacks of Chinese yuan at a bank in Beijing, China.

Trade in Chinese yuan-denominated crude oil futures has surged since President Donald Trump pulled the U.S. out of the Iran nuclear deal.

Launched on March 26, crude oil futures on the Shanghai International Energy Exchange (INE) were met with fanfare — and skepticism about how much a state-managed marketplace could displace the well-established crude trade in the New York Mercantile Exchange’s West Texas Intermediate and the Intercontinental Exchange’s Brent futures.

“Beijing ‘s attempts to ‘internationalize’ the contract appear to have paid off.”-BMI Research

But Trump’s move to reimpose sanctions on Iran may have spurred interest in the Chinese oil futures. Last Wednesday, daily trade volumes in INE oil futures hit a record of over 240,000 lots, double what they were on Tuesday when news of the renewed sanctions broke.

“There has been speculation that restrictions on Iranian oil sales and the lack of access to dollar financing will boost demand for yuan-denominated Shanghai futures,” said BMI Research in a note on Monday. “With China deepening its energy ties with Iran and given Beijing’s desire both to support the contact and — relatedly — to further internationalize the use of its currency, payment in yuan and benchmarking against Shanghai futures would seem logical.”

Veteran oil trader John Driscoll told CNBC last week that Iranian traders have the option of trading in Chinese yuan-denominated crude oil futures on the Shanghai International Energy Exchange — circumventing any restrictions on dollar-denominated trade and U.S. banks.

Doubts about how long it will last

Even so, some industry watchers remain skeptical over the long-term impact Iran will have on the Chinese futures, as Iranian crude is not deliverable into the Shanghai oil contract.

Even so, interest in the Shanghai oil futures have surpassed expectations, with Chinese state-owned companies and foreign interests taking part in the trade.

At least one oil sales agreement has been signed with state-owned major Sinopec, Reuters reported.

“Concerns over heavy state dominance in the oil sector does not appear to be dampening participation in the contract, neither does its denomination in yuan and the added FX risks this brings,” said BMI, adding that the futures are gaining tracing.

“Beijing ‘s attempts to ‘internationalize’ the contract appear to have paid off,” it added.

Oil prices finish lower, but mark 2nd straight weekly climb

MarketWatch

Getty Images
By

MYRAP. SAEFONG

MARKETS/COMMODITIES REPORTER

CHRISTOPHERALESSI

Oil prices on Friday pulled back from 3 ½-year highs, but marked a second weekly climb in a row, driven by uncertainty over how much oil the global market will lose following the U.S. decision to reimpose sanctions on OPEC member Iran.

On the New York Mercantile Exchange, June West Texas Intermediate crude oilCLM8, -1.19% fell 66 cents, or 0.9%, to settle at $70.70 a barrel, after closing at $71.36 Thursday—the highest since November 2014. The contract logged a roughly 1.4% weekly climb.

Read: Oil prices have surged above $70—here are 4 key reasons behind the rally

July Brent crude LCON8, -0.37% the global benchmark, lost 35 cents, or nearly 0.5%, to $77.12 a barrel on ICE Futures Europe, after notching modest gains Thursday. For the week, the contract climbed about 3%. The recent surge in futures this week has prompted renewed oil-market hopes from bulls that Brent crude could again reach $100 a barrel—— a level not seen since before the price crash of late 2014.

Bank of America Merrill Lynch on Thursday predicted a Brent price target of $90 a barrel by the second quarter of 2019, while noting a “risk of $100 a barrel” oil next year. “Although, we are concerned these market dynamics could unfold over a shorter time frame,” the analysts wrote in a note.

Read: U.S. gasoline prices could top $3 this summer thanks to Iran and Venezuela

Trump’s move Tuesday to abandon the 2015 international agreement to curb Iran’s nuclear program paved the way for the reimposition of U.S. economic sanctions on the Islamic Republic. The expectation that sanctions will again frustrate Iran’s oil industry and limit global supply has helped to provide support to oil.

In the past, sanctions against Iran have cut the country’s crude exports by around 1 million barrels a day. But because the European Union and other intentional players have decided to stick with the deal, U.S. sanctions are likely to affect only up to around 350,000 barrels a day, once reinstated within six months’ time, according to analysts at MUFG Bank.

Read: U.S. levies sanctions on Iran currency exchange that funds Quds military unit

Meanwhile, analysts at Commerzbank said Friday current crude-price levels indicated the Organization of the Petroleum Exporting Countries was now “regaining the price power it had lost” in the wake of the first U.S. shale boom that led to the price drop over three years ago.

“A large part of the price slide, which saw [Brent] plunge from over $100 to below $30 a barrel as a result of the price war between OPEC and the U.S. shale oil industry that began in autumn 2014, has now been reversed,” the analysts wrote in a note.

OPEC’s efforts to rein in a supply glut through production curbs helped boost prices by more than 50% last year. The cartel—led by Saudi Arabia—and 10 outside producers, including Russia, have been holding back crude output by around 1.8 million barrels a day since the start of 2017. The agreement is set to expire at the end of this year.

However, Saudi Arabia—the de facto head of OPEC—signaled this week that it could up its own production to make up for lost barrels from Iran.

Read: How Saudi Arabia can plus the hole left by Iranian crude without wrecking the OPEC deal

“OPEC members and Russia may put more oil on the market to counter the loss” of Iranian oil, said James Williams, energy economist at WTRG Economics. There is also the increased “probability that OPEC will raise quotas at the June meeting.”

Oil market participants Friday also saw further signs of ongoing growth in U.S. crude production. Baker Hughes BHGE, -1.16%  reported that the number of active U.S. rigs drilling for oil rose for a sixth week in a row, by 10 to 844 this week.

With oil prices at these levels, it “makes more sense for the U.S. to ramp up production,” said Scott Gecas, senior strategic account executive at Long Leaf Trading Group.

Among refined products, June gasoline RBM8, -0.36% settled nearly flat at $2.189 a gallon, but saw a weekly climb of 3.5%. June heating oil HOM8, -0.04% also ended little changed at $2.222 a gallon, for a rise of 3.2% on the week.

June natural gas NGM18, +0.18%  fell nearly 0.3% to $2.806 per million British thermal units, still settling about 3.5% higher for the week.

— Barbara Kollmeyer contributed to this article

Oil prices push higher after US walks away from Iran nuclear deal

  • Oil prices pushed higher in early trading on Wednesday.
  • U.S. President Donald Trump walked away from an international nuclear deal with Iran.
  • Walking away from the deal means that the U.S. will likely re-impose sanctions against Iran after 180 days.

Pump jacks and wells are seen in an oil field on the Monterey Shale formation, March 23, 2014, near McKittrick, Calif.

Getty Images
Pump jacks and wells are seen in an oil field on the Monterey Shale formation, March 23, 2014, near McKittrick, Calif.

Oil prices pushed higher in early trading on Wednesday after U.S. President Donald Trump walked away from an international nuclear deal with Iran, a move that may curb the OPEC-member’s crude exports in an already tight market.

Trump on Tuesday pulled the United States out of an international nuclear deal with Iran that was agreed in late 2015, raising the risk of conflict in the Middle East and casting uncertainty over global oil supplies.

Brent crude oil futures were at $76.21 per barrel at 0005 GMT, up $1.36, or 1.8 percent from their last close and not far off Monday’s $76.34, the highest since late 2014.

U.S. West Texas Intermediate (WTI) crude futures were up $1.18 per barrel, or 1.7 percent, at $70.24 a barrel, also close to highs last seen in late 2014.

“The big event of the night was President Trump’s cancelling of the nuclear deal made with Iran back in 2015. Sanctions will therefore (likely) be reimposed on Iran, which will ultimately affect Iran’s oil exports,” said William O’Loughlin, investment analyst at Australia’s Rivkin Securities.

Iran re-emerged as a major oil exporter in 2016 after international sanctions against it were lifted in return for curbs on Iran’s nuclear program, with its April exports standing at 2.6 million barrels per day (bpd).

This makes Iran the third biggest exporter of crude within the Organization of the Petroleum Exporting Countries (OPEC), behind Saudi Arabia and Iraq.

Walking away from the deal means that the United States will likely re-impose sanctions against Iran after 180 days, unless some other agreement is reached before then.

ANZ bank said Trump’s decision “puts into place a scenario that could see the crude oil market tighten significantly in H2 2018 and into next year.”

Closing Bell Exchange: US oil production blunts some of Iran impact

Closing Bell Exchange: US oil production blunts some of Iran impact  

Iran’s exports of oil to Asia and Europe will almost certainly decline later this year and into 2019 as some nations seek alternatives in order to avoid trouble with Washington and as sanctions start to bite.

Despite this, it is not yet clear, how strongly global oil markets will be affected.

The United States buys no Iranian oil, while the other signatories of the agreement, Russia, Britain, France and Germany, are opposed to ending the agreement, and may continue to buy Iranian crude.

Asia, by far the biggest importer of oil from Iran, will likely continue to take in some supplies as well, as it did during the previous round of sanctions.

“There are worries that Iran’s oil exports could fall by about 1 million barrels per day (bpd) from current levels,” said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting in Tokyo.

“The oil supply/demand balance is roughly in balance now, but it could turn to a complete supply shortage (in case of new supply curbs). Oil prices could rise at least $10 (a barrel), with Brent approaching near $90,” he said.