The OPEC+ meeting is set to kickoff, with a press conference scheduled for Thursday afternoon in Vienna. While there seems to be a vague outline of an agreement in hand, there is still quite a bit of uncertainty about what might come out of the meeting.
Saudi oil minister Khalid al-Falih injected a bit more uncertainty into the market with his comments in a Tuesday interview with Bloomberg. He said that Russia supports production restraints “in principle,” but that it would be “premature” to say what specifically they might agree to. He even said that OPEC+ still needs to “figure out what needs to be done and by how much.”
While there is always a bit of jawboning and word games ahead of any OPEC meeting, the comments suggest that there is still some disagreement over the specifics. “We need to get together and listen to our colleagues, hear about their views on supply and demand and their projections of their own countries’ production,” al-Falih said. “The next road to cross is whether all countries are willing to come on board and contribute to that cut.”
Saudi Arabia’s inclination is to cut aggressively, but it also does not want to anger U.S. President Donald Trump, who has bailed the Saudis out on the Khashoggi affair. Al-Falih was notably more circumspect regarding a production cut on Tuesday than he was only a few weeks ago, when he announced that Saudi Arabia would unilaterally lower exports beginning in December. Between then and now the U.S. Senate passed a bill ending American support for the Saudi war in Yemen, significantly upping the pressure on Saudi Arabia not to cut by too much.
Meanwhile, Riyadh still needs to convince Moscow to some degree. Even though Russian President Vladimir Putin said that he was on board, Bloomberg reports that Russia only wants to cut output by 150,000 bpd, a rather modest amount, which would mean more heavy lifting by Saudi Arabia to balance the market. Russia appears willing to go along with some sort of reduction, but it also does not feel the same urgency as the Saudis, particularly because of the dynamics of how its currency fluctuates with oil prices, making lower prices much less painful compared to Saudi Arabia.
Even if Saudi Arabia and Russia are not quite on the same page regarding the size of the cut and how to share the reductions, most analysts see some sort of deal emerging from Thursday’s meeting. In fact, even though Russia is not a price hawk in the same way that Saudi Arabia is, Moscow can gain from the damaged relationship between Washington and Riyadh.
“Having stayed largely silent on the Khashoggi case, Moscow has an opportunity to strengthen relations with Riyadh further if it accommodates Saudi Arabia,” Torbjorn Soltvedt, politics principal analyst for Verisk Maplecroft wrote in a note to clients. “An OPEC+ agreement led by Saudi Arabia and Russia that openly defies the US is unlikely; but we believe Riyadh has a good chance of securing the participation of Moscow in a flexible supply cut agreement.”
Soltvedt said that the consultancy’s “basecase scenario is a de-facto Saudi-led cut with Russian participation, but a flexible agreement that shies away from specific targets.” Individual countries may not have specific targets; instead a collective target could be the main takeaway.
Flexibility is important, Verisk Maplecroft argues, because the oil market could undergo another dramatic shift in just a few months’ time. “Another benefit of this approach is that it reduces the likelihood of another OPEC U-turn if the Trump administrations decides to not renew Iran waivers expiring in May,” Soltvedt of Verisk Maplecroft wrote. “With around 1 million bpd of Iranian oil in the balance, a rigid OPEC agreement in the traditional mold risks quickly being overtaken by events in 2019.”
The Trump administration – mainly Secretary of State Mike Pompeo and National Security Advisor John Bolton – are eager to tighten the screws on Iran. In October, as the U.S. was in the midst of preparing to issue waivers for eight countries importing oil from Iran, the oil market looked precariously tight. The ensuing price crash – no doubt made worse by the waivers themselves – has revealed a market much looser than expected.
That means that by May, the Trump administration will likely want to let most of those waivers expire. The result could be much more Iranian supply knocked offline. Saudi Arabia and Russia need to account for this possibility at Thursday’s meeting in Vienna. That means, as Verisk Maplecroft argues, a production cut, but one that can be easily rolled back should events require it.