This past Friday, April 20, about 20 OPEC and non-OPEC oil ministers met in Jeddah, Saudi Arabia to discuss their oil production cut deal. The Joint Ministerial Monitoring Committee (JMMC) will make a recommendation to OPEC about whether or not the production cut deal should be extended into 2019. The meeting will provide substantial guidance on how OPEC and its partners will proceed at their June 2018 meeting in Vienna.
Many bank analysts are declaring the oil glut largely resolved. This, they say, is evidenced by the fact that geopolitical tensions in the Middle East pushed oil prices up last week. Similar tensions last summer did not result in nearly as much of a jump in oil prices because global oil stocks were higher. The IEA agreed, saying that its data on global oil stocks supports the conclusion that OPEC and its partners have met their goal.
From OPEC’s perspective, outsider input can be helpful, but OPEC’s own data, forecasts and goals are what really count. Ultimately, Saudi Arabia, OPEC’s most powerful member, will likely set the policy.
Saudi Arabia has led OPEC in reducing oil production voluntarily—an average of 574,000 barrels per day—according to S&P Global Platts. The question is whether Saudi Arabia wants to continue the production cuts or not. Recent talk from the Saudi oil minister suggests that he wants to continue the production cuts into 2019 because he does not think that investment in oil projects has returned to sufficient levels.
Russian input will matter as well. It is not clear where Russia stands on the production cuts at this point. In January 2018, when the JMMC met in Oman, Russia pushed for OPEC to discuss ending the production cuts at the end of this year. Since that time, however, the talk has shifted. Russia and Saudi Arabia are now discussing a long-term framework for cooperation and collaboration on oil and other energy matters. A long-term agreement on production cuts is unlikely, but a long-term framework for cooperation is more likely. Russia is no longer calling for an end to the production cuts.
One option OPEC and its partners may consider is keeping the production cut total requirement while relaxing the country-by-country quotas. This would allow some flexibility for countries like Azerbaijan, Kazakhstan and Iraq who have chafed at the imposed quotas and frequently overproduced.
OPEC’s success at curbing oil production has largely come at the hands of involuntary cuts from Venezuela and Angola. Angola is experiencing a decline in production as its oil fields age and produce less oil. Venezuela’s March oil production, according to S&P Global Platts, fell by 80,000 barrels per day to only 1.49 million barrels per day. Outside of the state-owned Petróleos de Venezuela (PDVSA) strike in 2002 and 2003, this is the lowest level of production for the country's oil and gas company that Platts has observed since it began measuring OPEC’s oil production. This is largely due to the financial crisis in Venezuela that will probably continue for some time. The production decline in Venezuela is likely to continue in April, particularly as PDVSA oil workers are now resigning en masse.
By relying on involuntary oil production cuts to satisfy the overall production cut requirement of 1.8 million barrel per day, OPEC and its partners could conveniently continue to meet their “goals” and maintain the framework of cooperation while also satisfying the desire for higher production from some of its more unruly participants.
Look at last week’s JMMC meeting to set the tone for OPEC’s upcoming regular ministerial gathering in Vienna on June 22. It gives us the first look at what to expect for global oil production in 2019.