OPEC+ Afraid of Iranian Crude?

OPEC+ believes the global economic recovery is driving oil demand will release production as planned.

The 17th Ministerial Meeting of the Organization of the Petroleum Exporting Countries (OPEC) Non-OPEC Oil Producers (OPEC+) was held on Tuesday. Although the COVID-19 epidemic remains severe in some parts of the world, the optimistic recovery outlook has led OPEC to look forward to future global energy demand. The members agreed to maintain an earlier agreement to release 2 million b/d of capacity over time, depending on market conditions. Front-month WTI crude breached $68 / BBL, its highest level since October 2018, while Brent rose above the psychologically important $70 mark, up 39% 35% so far this year.

Tamas Varga, senior market analyst at Oil brokerage PVM Oil Associates, told me that while attention has been focused on the progress of the Iran nuclear deal, the promotion of COVID-19 vaccination has provided a strong assurance that demand will rebound over the summer in economies such as the U.S. Europe. The impact of Iranian crude on the market is likely to be muted, the tight balance in the energy market is expected to keep oil prices at high levels in the second half of the year.

OPEC+ : Improving economic outlook, reaffirming cut discipline

In the past month, oil prices have fluctuated wildly, while the outbreak in India other places the Iran nuclear deal negotiations have caused panic in the market. But the economic recovery in China, the U.S. Europe has put the bulls back in the lead in the derivatives market.

OPEC Secretary General Mohammad Barkindo said in his opening address that the future gradual production increase is in line with the bright outlook for the economy oil demand, that the direction of the sustained global economic recovery will change. OPCE+ forecast global GDP growth of 5.5 per cent this year, up 5.4 per cent at its last meeting. Balkindo also stressed that now is the time to be complacent that the COVID-19 epidemic remains a major threat.

Iran is a founding member of OPEC, Balkindo sees Iran as an important member of the organization. He said the expected resumption of Iranian production exports will be carried out in an orderly transparent manner OPEC hopes to maintain the market supply demand situation without disruption.

According to a statement released after the meeting, OPEC+ agreed that the fundamentals of the energy market continue to be strong, with vaccination programs advancing in various regions, economic recovery continuing in most parts of the world, significant signs of improvement in oil demand. According to the Declaration on Cooperation, oil producers reaffirmed their commitment to stabilize the market gradually release 2 million b/d of production capacity to the market. Under the April agreement, OPEC+ increased output by 350,000 b/d, 350,000 b/d 441,000 b/d May to July, with Saudi Arabia releasing 1 million b/d of its voluntary quota during that period. Saudi Energy Minister Abdul-Aziz said the kingdom produced 8.482m b/d of oil in May will continue to increase production as planned.

Proactive cuts by producers have reduced global oil supply by 2.9 billion barrels since May 2020, accelerating the rebalancing of the market, the statement said. The parties agreed to the request of some countries that have yet fulfilled their quotas to extend the period of offset production cuts until the end of September 2021. A sustainable oil market depends on achieving 100% agreement among all participants taking steps to offset overproduction if necessary. OPEC+ reiterated the need to continue to consult closely monitor market fundamentals would maintain the current monthly meeting system, with the next ministerial meeting scheduled for July 1.

Global stocks fall back on Iran shock limited

The vaccination push is helping the economies of the world's major energy consumers quickly stabilize rebound. In the European region, for example, the IHS Markit composite purchasing managers' index climbed to 56.9 in May, its highest level since February 2018, as curbs were loosened. The European Union is set to open up travel across its 27 member states this summer, which is seen as boosting recovery prospects in some of the worst-hit economies.

Meanwhile, European aircraft maker Airbus last week raised its production targets, betting on a recovery in the global aviation industry that would bode well for demand for jet fuel, which has been hit hard by the outbreak. The American Automobile Association (AAA) says gasoline prices will be the highest in nearly seven years this summer. Still, it is unlikely to stop the road trip boom.

The rebound in demand has led to a rapid decline in global oil stocks, with OECD commercial oil stocks already 2 per cent below the five-year average in April down 250 million barrels a peak of 3.2bn barrels in mid-2020. The inventory cycle is 66 days, down 12 days April 2020. Commercial oil inventories are down 10% this time in 2020, with crude gasoline stocks down about 9% distillate stocks down 21%, according to data released by the U.S. Energy Information Administration in May.

the supply side, the recovery of crude oil production is difficult to constitute a substantial threat to temporarily, in the past year shale oil producers in the severe market ushered in a new round of consolidation financing environment, including conocophillips $9.7 billion acquisition of Kang Qiao resources, chevron $5 billion acquisition of the noble energy, pioneer natural resources' $4.5 billion acquisition of parsley energy Devon Energy merged with WPX, a drilling firm.

Varga told me that for shale oil producers, the era of cash-burning expansion is over. While the U.S. rig count has doubled since its low point in August, it is nowhere near the more than 900 RIGS seen at the height of the shale boom in 2018-19. Given current policy market conditions, it is difficult for US oil production to gain momentum.

The EIA's Shortterm Market Report released last month projected U.S. oil production to average 11.02 million b/d 11.84 million b/d in 2021 2022, well below the monthly peak of 12.87 million b/d in late 2019, with shale oil production estimated at 7.71 million b/d in May, 1.5 million b/d below the November 2019 peak. Varga points out that WTI crude prices at the end of 2019 will be about $10 lower than they are today, which suggests at least one thing: price is no longer the only indicator of shale production levels in the post-epidemic world.

The authors note that the global clean-energy transition is also prompting energy companies to take the initiative. In its energy outlook last year, BP said crude oil consumption would fall by more than 50 per cent by 2050 renewables' share of primary energy would rise to more than 40 per cent 5 per cent in 2018, as governments took more aggressive steps to control carbon emissions. French energy giant Total CEO Patrick Pouyanne announced this year that the group was accelerating its transformation into a broad-based energy company. Last week's ruling by a regional court in The Hague, the Netherlands, that Shell must cap its carbon emissions by 2030 at 45 per cent below 2019 levels added to the pressure on oil gas companies, which are already facing intense scrutiny governments investors.

The U.S. shale oil industry faces challenges to recovery

On the other hand, Iran's crude oil exports are expected to be an important factor behind the recent fluctuations in international oil prices. Iran is preparing to boost crude oil production exports as talks continue to progress. Despite reports of a last-minute halt in the talks, the goal remains to reach a deal before Iran's presidential election on June 18. Iranian Foreign Ministry spokesman Saeed Khatibzadeh said on Monday that the ongoing meeting of parties concerned on the Comprehensive Plan of Action (JCPOA) on Iran's nuclear issue in Vienna, Austria, has made significant progress, but many key issues remain to be resolved. He revealed that the talks were " deadlocked" that key issues were being discussed. Iran is in no hurry to reach a deal, urging the current US administration to make a final decision on the previous administration's policy towards Iran.

Speculatory long positions in WTI crude fell to a new low for the year in mid-May amid concerns about Iranian crude, according to a CFTC position report. Last week, money returned to bullish oil prices as strong macro data the US, Europe other economies continued to come out. Alexander Novak, Russia's energy minister, said recently that while Iranian supply would rise, the recovery in global demand should be strong enough to absorb it, that the alliance of producers stood ready to balance the market by changing supplies.

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Source: International Petroleum Network