Deciphering OPEC's Mixed Messages About Oil Production
Ellen Wald | Jun 06, 2018 10:49
After oil prices took a nosedive last week on news that OPEC and Russia were moving towards increasing production by as much as 1 million barrels per day, the big oil producers now appear to be backtracking—or at least delivering mixed messages. This kind of posturing is likely designed to prevent price swings like the market saw ten days ago and should not be interpreted as a firm indication of what OPEC will or will not do in Vienna on June 22 and 23.
Saudi Arabia, Kuwait, Oman and the UAE met “unofficially” in Kuwait this past weekend. The ministers refused to say anything about the discussion other than issue a vague statement about maintaining their “existing cooperation and [continuing] the successful endeavor carried out by the participating countries.” Most OPEC watchers would interpret this statement as an indication that the Persian Gulf power-players do not support an increase in oil production at OPEC’s next meeting.
However, the ministers followed up this statement with a call for “sustaining the current partnership in order to continuously adapt to ongoing market dynamics in pursuit of the interests of consumers and producers.” This statement would indicate that the Gulf producers are, in fact, open to increasing production as indicated by market conditions. The oil market is looking increasingly tight as Venezuela’s oil production continues to face bottlenecks in Texas and North Dakota.
Lastly, the ministers stressed that investment levels in oil projects still have not returned to levels necessary to provide for future demand. Saudi Arabia in particular has emphasized this benchmark as key to the recovery of the oil market after the 2015 price collapse.
This is really a meaningless benchmark for ministers to rely on. The problem with using capital expenditures and investment as a benchmark is that this price-point is different for every company. In fact, some oil companies, like Royal Dutch Shell (LON:RDSa) for example, have drastically altered their spending and investment strategies and may never again invest in the kind of massive oil projects that used to be the hallmark of major international oil companies (IOCs).
Even with more revenue from higher oil prices, some companies may choose to increase the dividends they offer to shareholders or may decide to invest in smaller-cap projects in shale oil regions instead. There is no way to predict what this magic “investment-stimulating” number will be.
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These statements were likely intentionally vague and designed to counteract statements made at the recent St. Petersburg Economic Forum that indicated OPEC and Russia were keenly interested in increasing production. Those statements alone pushed oil prices lower whereas last Saturday’s Kuwait meeting did not appear to impact oil prices.
Russia is also taking care with its statements this week. Russian oil minister Alexander Novak is adjustments to production would depend on demand.
Meanwhile, Aramco raised most of the prices on July oil contracts for customers in Asia, northwestern Europe and the Mediterranean. This should not be read as an indication that Saudi Arabia does not intend to increase production this summer. Future oil contracts are priced based on current market conditions and if OPEC+ does increase production Aramco will likely respond to any price changes in its August, September and October contracts.
Rather than reading these mixed messages and tight-lipped statements as indications that OPEC+ does not intend to raise production at all at their meeting in June, market watchers should simply see the producers as trying to prevent wild price swings as they hold their usual pre-meeting discussions.
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