Deal at hand for Opec+ but geopolitical challenges remain

An increasingly pressured Iran will be represented at the two-day Vienna meetings by long-serving Oil Minister Bijan Zanganeh

Saudi Energy Minister Al Falih with his Russian counterpart Alexander Novak at the joint ministerial committee meeting in Jeddah in May. Reuters

It’s pretty much a done deal for Opec+ as they head into their summer meeting in Vienna on Monday.

The alliance led by Saudi Arabia and Russia, which is responsible for drawing back 1.2 million barrels per day of supply from the markets since January, will renew the pact for the second half of the year.

Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin agreed on the sidelines of the G20 meeting in Osaka, Japan, to extend the supply cut agreement from July onwards.

The meeting between the two leaders has paved the way "for the reduction of global stocks, and thus the balance of markets, and the recovery of investment rates to ensure future energy supplies”, Saudi Arabia's Energy Minister Khalid Al Falih tweeted on Saturday.

Vandana Hari, founder and chief executive of Singapore-based Vandana Insights, said: "Opec and non-Opec may need to keep their output restraints in place until global economic growth returns to its pre-trade war momentum. The best-case scenario would be for that to start happening sometime in 2020."

The Osaka consensus makes the extension of accord a pretty much foregone conclusion for the Opec+ alliance when it convenes on July 1 and 2. The challenges facing the global oil markets, however, have become more fractious and complicated since the alliance members last met in mid May.

On Sunday, the UAE Minister of Energy Suhail Al Mazroui tweeted that he was confident of a productive meeting in the Austrian capital.

Saudi Energy Minister Khalid Al Falih said OPEC members agree on the need to extend oil production cuts but are undecided whether it needs to be for six or nine months.

"Certainly it is a rollover, consensus is emerging ... Everybody I am talking to is assuring that conformity in the second half is going to be a lot more uniform than what we have seen in the first half," Mr Al Falih told Reuters on Sunday.

The global oil industry has borne the brunt of escalating geopolitical tensions in the Middle East over the past couple of months. Tankers carrying oil and products have come under repeated attacks in the waters of the Arabian Gulf. While there is no clear evidence to implicate a state or non-state actor, the US has pointed finger at Iran, pushing the region close to a full-blown conflict.

Rates for shipping through the Strait of Hormuz, through which a third of the world’s seaborne oil transits, have rocketed following the incidents. Oil, which had proved immune to geopolitical risk, reversed earlier bearishness to respond to possible risks of a US military offensive against Iran.

The meeting in Vienna will see representation from an increasingly pressured Iran, which had waivers for its top buyers cancelled towards the end of April as well as sanctions imposed against its Supreme Leader.

The producers will likely downplay geopolitical concerns by reaffirming their ability to supply should the region face disruptions.

“They will mention they have sufficient spare capacity to address disruption risks, if the oil market requires more barrels. Also, the over-compliance gives Saudi Arabia the flexibility to adjust volumes higher if the oil market would require more oil without being in breach with the deal,” said Giovanni Staunovo, a commodity analyst at UBS.

Negotiations at the meeting are expected to be fairly straightforward, Iraq’s Energy Minister and Deputy Prime Minister Thamir Ghadhban said in London on Friday.

"This is normal in the oil business, ups and downs but the vision is very clear – we want to stabilise the market, we want to avoid volatility,” he said.

In order to avoid fractiousness during the upcoming meeting, a simple rollover of existing cuts is the most favoured option by the producers.

"I expect the group to rollover for six months with unchanged cuts of 1.2 million bpd. Otherwise new negotiations are needed ... which requires time and might create larger challenges than a simple rollover,” said Mr Staunovo.

Bearishness in the markets could still be a risk, should the world economy move into a recession. The Bank of America Merrill Lynch cautioned in a note last week that prices could fall as low as $30 per barrel if China moved to devalue its currency and trade talks with the US fail. However, that threat is off the table in the short term as US President Donald Trump and Chinese President Xi Jinping in Osaka have agreed to continue discussions on tariffs. This breakthrough, however, is unlikely to dramatically reverse fortunes for the oil markets, noted Ms Hari.

"The existing tariffs are not being lifted, which means the shadow cast over global economic growth and oil demand remains in place," she said.

UBS expects oil prices to move into $70 per barrel territory with reduction in US inventories in the third quarter. Brent was trading at $64.74 per barrel at 10.26am UAE time on Sunday.