OPEC’s next move might be an oil production hike
Several of the world’s largest oil producers failed to reach an agreement to freeze output to help alleviate a glut of global crude supplies, but the Organization of the Petroleum Exporting Countries may soon need to start discussing an increase in output instead.
The logic is a bit hard to grasp, but not that difficult if you look at some of the reasons why producers couldn’t come up with a deal to cap production-and why oil prices LCOM6, +1.63% didn’t end up taking that big of a hit on Monday.
A fight for market share comes to mind first. OPEC, in particular cartel heavyweight Saudi Arabia, had previously made it clear that it didn’t want to lose its share of the oil market to non-OPEC producers, such as Russia and the U.S.
The U.S. has seen its shale-oil production skyrocket in recent years but over the last few months, U.S. shale output has generally been on the decline, with the U.S. government estimating oil output from seven domestic shale plays will decline by 114,000 barrels a day to 4.836 million barrels a day in May.
The surge in U.S. shale production over the last half decade are so had put the Saudis on the defensive when it comes to market share. But now, the kingdom will have to consider its response to sizable declines in U.S. output-and the window that might open for other Saudi competitors to fill the vacuum.
Then there’s the strike that began Sunday by thousands of oil workers in OPEC-member Kuwait. The country’s output has been sliced by more than half-to about 1.1 million barrels a day from nearly 3 million barrels a day.
Production from non-OPEC Russia, meanwhile, hit a post-Soviet record of nearly 11 million barrels a day earlier this year.
Iran, another OPEC member, is making its presence more visible in global markets, ramping up production after Western nations lifted sanctions on the nation earlier this year.
“Pressure is building up for the leading Persian Gulf swing producer, Saudi Arabia, to decide if it should increase production sharply to offset the U.S. and Kuwait situations, and to possibly prevent Iran and Russia from achieving any new market share gains,” said Richard Hastings, macro strategist at Seaport Global Securities.
The situation suggests that “oil production from the Persian Gulf and the so-called ‘call on OPEC’ could tilt higher, and not lower,” he said. The “call on OPEC” refers to the global demand for oil from the group’s members.
Hastings said that OPEC could “push production as high as 33 million barrels a day” in the third quarter of this year, after noting that the crude-oil balance could “tighten up dramatically” during the second and third quarters of 2016.
OPEC output posted a monthly climb of 40,000 barrels a day to about 32.38 million barrels a day in March, according to Platts survey issued earlier this month.
The “bias is very likely going to tilt back to a higher surplusin order to maintain price pressure upon Iran, Russia and tight-oil (aka shale) producers in North America,” Hastings said. “The situation in turning more tense, in our view, with a poor geopolitical backdrop going into mid-2016.”
That would bring the market right to OPEC’s next scheduled meeting in Vienna on June 2.