'Haves' can overpower 'Have-nots' when Opec meets in Vienna

Vienna

OPEC and its friends can be divided up in many ways, but the most useful in the current environment is the "haves" and the "have nots". The first group consists of Russia, Saudi Arabia and the other countries of the Arabian Peninsula, who have the spare capacity to raise production if they wish.

The rest fall into the other camp, with little, or no, ability to raise production. Because Saudi Arabia and Russia are trying to assemble support for lifting the group's output. They will likely find some allies, but face opposition led by Iran and Venezuela.

This means Opec's June 22 meeting is likely to be stormy. Both Venezuela and Iran have written to the group urging unity against external sanctions, citing Article 2 of its statute, something I identified recently as potentially driving negotiations. Their move is unlikely to sway Saudi Arabia, which is facing growing US pressure for a million-barrel-a-day increase in supply, or Russia, where the oil industry is urging restraint to be eased.

Opec is already forecasting a big global oil deficit for the second half of 2018. This assumes that the group continues to produce as much oil as it did last month.

Venezuela's output will fall further in the coming months. While President Nicolas Maduro declares the country could boost output if Opec relaxes output cuts, the truth is that output is well below the target level it agreed in 2016.

The International Energy Agency said capacity could fall by several hundred thousand barrels a day by the end of the year. The outlook for Iranian production is even worse.

There is still no clarity from US authorities on how much buyers must cut their purchases of Iranian crude in order to secure waivers from sanctions.

While they are maintaining volumes for now, refiners in Europe appear to be taking a cautious approach for the future.

Trafigura Group warned recently that the market impact could eventually be much bigger than many people are expecting, with problems already emerging on the availability of freight insurance for Iranian cargoes.

President Donald Trump's sanctions on Iran will target condensate as well as crude sales, unlike those imposed by his predecessor, and his required reductions will almost certainly be more than the 20 per cent every six months that satisfied the Obama administration. Even a conservative estimate - that a 25 per cent cut will be enough to secure a waiver - would cut Iran's exports by 675,000 barrels a day by the start of November if implemented by all the country's buyers.

Russia, Saudi Arabia and the rest of the Arabian Peninsula would need to boost their output by 875,000 barrels a day over the next six months just to offset expected declines from Iran and Venezuela and prevent the anticipated second-half shortfall from getting any bigger. If Mr Trump demands bigger cuts to purchases of Iranian oil, that volume would increase.

That is not an impossible task. Russia's Rosneft has been testing capacity to bring new production into use and believes it can add 100,000 barrels "in just a few days", according to analysts at Aton LLC.

Gazprom PJSC's oil unit estimates the country has about 500,000 barrels a day of spare production capacity. Saudi Arabia says it has around 1.5 million barrels a day of spare capacity that could be brought into operation within 90 days - but it has never tried to sustain production at that level.

In the end, the "Have-nots" may be powerless to prevent Saudi Arabia and Russia from raising production without them. But doing so would undoubtedly stoke tensions in the Middle East and simultaneously reduce the spare capacity available to counter any disruption to supply. BLOOMBERG