5/28/2016

5keyissuesOPECmustwrestlewithatitsJunemeetingMarketWatch

5keyissuesOPECmustwrestlewithatitsJune
meeting
ByMyraP.Saefong
Published:May27,20162:42p.m.ET
Oiloutputfreezeisneededtocreateafirmpricefloor:analyst

Slide1of
TheoilmarkethasgivenmembersoftheOrganizationofthe
PetroleumExportingCountriesareasontocrackacautious
smilewhentheymeetJune2inVienna.

TheOrganizationofthePetroleumExportingCountries
AFP/GettyImages
willholdameetingJune2atitsheadquartersinVienna.

Signsofamorestableoilmarkethaveemergedsincethe
cartelmemberslastheldaregularlyscheduledmeeting.Oil
pricesCLN6,+0.04%LCON6,0.38%havegainedmore
than30%sofarthisyear.AndbothWestTexasIntermediate,
theU.S.benchmark,andBrentcrude,theglobalbenchmark,
brieflytradedabove$50onThursday.

Globalproductionisfallingfollowingalargerthanexpected
weeklydeclineincrudesupplies,accordingtoareportfromtheAmericanPetroleumInstitutelateTuesday.The
reportcomesasthenumberofactivedrillingrigshavebeeninasteadystateofdeclineandoilcompanyspending
cuts,oilandgassectorbankruptcies,andrecentoutagesinAfricaandNorthAmerica,havebeensupportivefor
crudeprices.
OPECmembersarelikelytobealittlehappiergoingintoJunesmeetingthantheywereinDecember,TomPugh,
commoditieseconomistatCapitalEconomics,saidinrecentresearchnote.
Oilpriceshavesurgedbyaboutathirdsincethestartoftheyear,hesaid.Thehigherpriceswillhaveremoved
someofthepressureon[OPEC]toacttopropupprices.
Butthatdoesntmeanmajoroilproducerscansitbackandrelaxwhentheygettogether.Oilmarketsupplyand
demandhaventfullystabilizedandtherealotoffactorsthancan,andprobablywill,rockOPECsboat.
HeresarundownofwhatanalystsseeasthekeyissuesathandandpossibleoutcomesfortheOPECsummit:

Slide2of

Productionfreeze
Talkofaproductionfreezehasresurfacedaheadofthe
meeting,whichfollowstwofailedattemptsthisyearto
successfullyimplementaplantostabilizeglobaloil
production.

OilministersfromQatar,SaudiArabiaandVenezuela
AFP/GettyImages
agreedinFebruarytofreezeoutputifothersdoto.

Themarketiseagertohearaboutaviableagreement
betweentheOPECproducersand[nonOPEC]Russiatolimit
production,saidDr.ArielCohen,anonresidentseniorfollow
attheGlobalEnergyCenterattheAtlanticCouncil.

Thisisaclassicprisonersdilemma,saidCohen,whoisalsoananalystatcrowdsourcedconsultancy,Wikistrat.
http://www.marketwatch.com/story/keyissuesopecmustwrestlewithatjunemeetingevenasoilnears5020160525/print

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5keyissuesOPECmustwrestlewithatitsJunemeetingMarketWatch

Whoeverstartstocutloses,becauseothermemberscheat.
SaudiArabia,Russia,QatarandVenezuelasaidinFebruarythattheywouldntincreaseoilproductionabove
Januaryslevels,butonlyifothermajoroilproducersfollowedsuit.OPECmemberIranwasveryclear,thenandnow,
thatitwillcontinuetoraiseitsoutputtopresanctionlevelsbeforeitllevenconsidersuchamove.
MajoroilproducersmetagainduringahighlyanticipatedspecialmeetinginAprilandfailedtoreachadeal.
Themarketreallyneedstofreezeproduction,inordertocreateafirmpricefloorandallowtheoilpricetogradually
creepbackupward,saidDr.JustinDargin,seniorfollowattheOxfordInstituteforEnergyStudies.
Read:Itstooearlyfortheoilmarkettosayfarewelltooversupply

Slide3of

Marketshare
Ofcourse,thebiggestobstacleingettingadealdoneto
freezeoutputismarketshare.
ThereareconcernsthatSaudiArabiaandRussiacould
increaseoutputinthenextfewmonthstomaintainmarket
shareasIranrampsupitsproduction,saidPugh.
IrandidntbothertosendOilMinisterBijanZangeneh
AFP/GettyImages
(above)totheDohameetinginApril.

InApril,Iranraiseditsdailyoiloutputby300,000barrelsa
dayto3.56millionbarrelsaday,accordingtothe
InternationalEnergyAgency.Thatsalevelnotseensince

beforesanctionsonthecountryweretightened.
Read:Iranoilcamebackatmuchfasterthanexpected:strategist
MarketshareismarketshareanditisnotinSaudiinteresttomakeanymeaningfulconcessiononoutputthatgrants
TehrangreatermarketsharewithoutsignificantconcessionsonothermatterssuchasSyria,Yemenandsimilar,said
ThomasODonnell,aglobalenergyanalystandafellowattheAmericanInstituteofContemporaryGermanStudies.
Fornow,thereisnoevidencethatsuchdealsarenearathand,saidODonnell,aWikistratanalyst.

Slide4of

Saudioilregimechange
TheOPECmeetingwillalsobethefirstwithKhalidalFalihas
SaudiArabiasoilminister.
AlFalih,chairmanofSaudiArabiaOilCompany,replaced
longtimeSaudiOilMinisterAlialNaimiearlierthismonth.

KhalidalFalihreplacedAlialNaimiasSaudiArabiasoil
AFP/GettyImages
minister.

Read:HereswhatthedepartureofSaudiArabiasalNaimi
meansforoilprices

Theappointmentofanewenergyministerissignificant
becauseitsignalsthatSaudiArabia,underPrince[Mohammedbin]Salman,intendstodoubledownonitsmarket
sharestrategyandcommitmenttolowoilprices,saidRaviRamamurti,adistinguishedprofessorattheDAmore
McKimSchoolofBusinessatNortheasternUniversity.
Read:MeetKhalidalFalih,SaudiArabiasnewoilminister

http://www.marketwatch.com/story/keyissuesopecmustwrestlewithatjunemeetingevenasoilnears5020160525/print

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5keyissuesOPECmustwrestlewithatitsJunemeetingMarketWatch

Salmanwantslowoilpricesfortworeasons:theeconomicmotivationistoslowthepaceofsubstitutionofoiland
thepoliticalreasonisthatloweroilpricesmakeiteasierforthePrincetoadministerhardmedicinenecessaryto
diversifyawayfromoil,saidRamamurti.
Lastmonth,theKingdomapprovedalongtermblueprintforeconomicreform,dubbedSaudiVision2030,andsaid
itplanstomakeitselfcapableoflivingwithoutoilwithinthenextfouryears.
Read:4thingsSaudiArabiaseconomicreformplansaysaboutoil
Evenso,ODonnellsaidnothingofsubstancewillchangewiththeappointmentofthenewoilminister.Theonly
ingredientofimmediateinteresttothemarket[inregard]totheJunemeetingistheapparentlygreaterproclivityof
SalmantotakeontheIranians.

Slide5of

Seasonaldemand
Ofcourse,thereisachanceOPECmemberscanjustleave
theoilmarkettotakecareofitself.
Thepeaksummerenergydemandseasoniscomingup,
whichwilllikelyresultinloweroilexports,saidDargin.
OECD,IEA

Soon,themarketmayseeincreaseddemandandreduced
exportsleadingtotheoilpricestrengtheningsomewhateven
withoutaproductionfreeze,hesaid.Soevenwithouta
workableproductionfreezecreated,therewillbelessoilonthemarket.
Read:Issurprisinglystronggasolinedemandasignofwhatstocomethissummer?

Slide6of

Lipstickonapigoutcome?
Withsomanyfactorstoconsider,OPECwillhaveto
collectivelyfindamiddleground.

Shutterstock

AtleasteightOPECmembersfavoraproductioncut,but
thosecountriesaccountforabitlessthanhalfofthecartels
output,accordingtoJamesWilliams,energyeconomistat
WTRGEconomics.Theywouldprobablysettlefora
productionceiling.

Kuwait,Qatar,SaudiArabiaandtheUnitedArabEmirateshavehalfhaveofOPECsproductionandrelativelystrong
financialbutweakeningportfolios,hesaid.Soatmost,OPECmayputacaponproduction,hesaid.
ButODonnellsaidafterthemarketdiplomacyfiascoinDoha,whereallthetalkaheadofthatproducersmeeting
pointedtoaproductionfreezedealthatneverreallyhappened,itisnotrationaltoexpectanysubstantivechange
fromOPECinJune.
HelimaCroft,headofcommoditystrategyatRBCCapitalMarkets,saidSaudiArabiamaysignalthatthereisnothing
thatwillinducethemtopullproductionatanypointorsalvageafloor.
Still,OPECcanpotentiallytrytoputlipstickonapigortrytodressitupbyhavingsomekindofstatementthattries
tobringpeopletogether,saidCroft.
SaraSjolincontributedtothisarticle.
http://www.marketwatch.com/story/keyissuesopecmustwrestlewithatjunemeetingevenasoilnears5020160525/print

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5keyissuesOPECmustwrestlewithatitsJunemeetingMarketWatch

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