The Crude Report: The Opec+ balancing act continues

Author Argus

Next week’s Opec+ meeting will focus on the next production quota increase, a critical decision that will affect global crude oil prices.

In this episode of The Crude Report, Editor-in-Chief Jim Washer and senior news reporter Rowena Edwards discuss what factors will play into Opec+’s decision and other events in the Middle East sure to affect crude oil markets.  

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Jim: Hello everyone and welcome to this episode of The Crude Report. My name is Jim Washer. I'm editor-in-chief here at Argus. And with me today is our Opec and Middle East correspondent Rowena Edwards, who is joining us for this podcast to discuss the latest developments in the Opec+ alliance, and to look forward to next week's ministerial meeting. So, Rowena, thanks for joining us today.

Opec's last meeting was, to say the least, eventful - we had the row over baselines. We had the spat between Saudi Arabia and the UAE. Will they be looking forward to a more straightforward meeting this time? What are your expectations?

Rowena: Thanks, Jim. And yeah, thanks for the introduction. As you say, the last meeting was quite tumultuous, but it did end up eventually with a unanimous agreement. And just to recap that quickly, that was to raise quotas by 400,000 b/d each month in August to April and then by 432,000 b/d each month from May next year.

And that's going to be until the remaining cuts are unwound. In the next meeting, which is going to take place on the first of September, they're going to be looking at these 400,000 b/d increase planned for October, just looking to see if that still makes sense.

So, in terms of market fundamentals, there are some concerns to take into consideration. You know, for example, the spread of the Delta variant, and whether that will dampen any demand recovery. Prices have actually fallen in recent weeks. But, you know, on that note, delegates we've spoken to believe that even with the planned supply increase, global stocks are going to be staying below the five-year average, so they think that that pressure on prices we've seen recently is temporary.

The Global Supply and Demand Balance

Source: Argus Consulting

On the other side, a few delegates, we've spoken to actually believe that the current plan is a little too strong, sort of saying, actually, we may not need the full 400,000 b/d returning to the market each month. I think in the current mechanism that Opec has, there is that level of flexibility to say, okay, you know, it's really obvious that in “x” month, we have to hold back, then they can do that. But what we tend to see when Opec+ sets these longer-term plans is that they have to have really quite a good reason to deviate from it.

So, you know, for October, having a straightforward meeting will be so important for market sentiment. And, you know, especially given the last meeting, as you say, and given what we've heard from delegates so far, we don't really see it as very likely there'll be enough will within the group, or even reason to change the current plan. So yeah, for now, these considerations do point to a 400,000 b/d increase for October as planned. And that's where we're currently seeing the situation right now.

Jim: Also, since the last meeting, we've had this intervention, of course, from US President Joe Biden worried about rising domestic gasoline prices and asking Opec+ to increase production. Is that going to factor into their calculations at all? How do you think they're going to respond?

Rowena: Yeah, there has been some US pressure from the statement that they put out. But, honestly, it would be surprising if this came into play. It's, you know, it's not really how Opec makes decisions. Opec does like to emphasize that it works off fundamentals and not politics. At the end of the day, it's looking to maintain a stable market. And it does that by taking into consideration, you know, stock levels, producer and buyer interest, how price affects investment, and the long-term supply outlook as well.

From what we've heard, delegates think that this current plan achieves this level of stability, with some even saying, as I mentioned previously, that the amount coming back might be a bit too much. From a market perspective, as I've said, prices have fallen. So, while that's something to consider, especially with these concerns surrounding the Delta variant, and it could also mean that the pressure from the US is likely to be lower now than it was two weeks ago, say, but there are also a couple of other things to consider here from the supply side.

We're hearing from delegates, and actually, you know, Saudi oil minister Prince Abdulaziz has mentioned this before, that the quota increases as they currently stand could be difficult. Capacity for some Opec+ members has stalled or even declined since they agreed the deal last year. Although you know, some other countries might be able to fill the gap there. And ultimately, it's in Opec's interest to get the right balance in these policies to make sure it doesn't spark another US shale boom.

We've seen Goldman Sachs say that the way to do this is for Opec+ to focus on maintaining a tight physical market while guiding for higher future capacity and disincentivizing competing investments. And that's exactly what it's done with this latest production policy agreement. I think a final point to make here is that the group has been striking quite a cautious tone with its policies and trying to prepare for any unexpected outcomes. That doesn't look like it's going to change so to answer your question, with all of this in mind, we don't see that Biden's position will be factored into Opec's decision here.

Jim: Okay. Now, the other major news since the last Opec meeting has, of course, been the US withdrawal from Afghanistan and the Taliban regaining control of the country. Not a story with obvious immediate impact in all markets, but with implications clearly for nearby producers - both Iran and Iraq. One question, looking more of a sort of medium-term, I suppose though, is whether this changes expectations around Iran, around how the US approaches the revival of the Iran nuclear deal, and about prospects and timelines for rebounds in Iranian oil exports. What are your thoughts on that?

Rowena: It's an interesting question. And I think, certainly, the recent events in Afghanistan come at quite a pivotal time for Iran. I think in one way that there could be an impact is that Tehran has so far wanted more from the JCPOA, or the nuclear deal, and they've held this view that if they hold out, they'll get exactly that. And the US exit from Afghanistan may reinforce that impression. And, you know, Iran has been asking for guarantees that the next US president would not overturn the nuclear deal again, but there is this renewed domestic US pressure on Biden over his every foreign policy move following Afghanistan.

So, you know, he's gotten away with actions in the past have been somewhat unpopular in Congress, such as the outreach to Iran, but now maybe this new level of scrutiny on his actions could actually further limit his ability to compromise, which could make Iran reconsider their approach in negotiations. Yes, the US can exit from talks just as it left Afghanistan, but that would leave sanctions in place on Iran's oil sector. So really, you know, the US holds all the leverage here in the form of sanctions. And I think with that in mind, we expect things to move as they would have done before Afghanistan.

I think, actually, the real question from the perspective of Opec+ is the timeline here for the US-Iran deal, which just keeps slipping. I mean, we saw talks suspended in June, after Iran's new president Ebrahim Raisi won the election. And we don't actually have a date for when talks in Vienna are going to resume. So that there are indications that Iran will return to the negotiating table. And that's actually come from the new pick for Iran's Foreign Minister Hossein Amirabdollahian. But he does still have to be approved. And he has emphasized that these negotiations will only restart when the new Iranian administration has settled in. And all of this really affects how quickly Iranian barrels can return to the market, which brings really quite a level of uncertainty and makes it quite difficult for Opec+ to plan for this.

Jim: Okay, thanks for that Rowena, I also want to just wrap up here by asking you about Iraq, which is a country you spend a lot of time looking at as part of your sort of day-to-day work here. And just asking the general question, really about the country. You know, after the challenges of the past year in terms of Covid-19, weak global economy, and weak but now recovering oil demand? I mean, what's your assessment of the Iraqi oil sector? And I'm thinking here in terms of things like production, investment, plans for boosting capacity, how do you think they're doing?

Rowena: Yeah, Iraq has had quite a challenging year. But when you have an economy that relies so heavily on oil revenues, last year's oil price collapse alongside Opec+ production cuts means its economy was always going to be hit quite hard. I think Iraq has done quite well to boost capacity in recent years, especially when it struggled with financial constraints and battling Islamist group ISIS. But its latest capacity targets are a little bit ambitious, and not hugely realistic.

So it's looking to boost crude production capacity to 8mn b/d by 2027 - and that's roughly from around 5mn b/d now. And this is actually up from a previous target of 7mn b/d in that same year, which in itself was quite ambitious. And I think the reason that we think this is because Iraq is facing quite a few challenges related to financial issues to attract and retain investments from foreign oil firms at the moment, one of the biggest being ExxonMobil's upcoming exit from West Qurna 1. It's really going to rely on this foreign investment to get anywhere near these 8mn b/d target.

So one of the biggest things that these firms are struggling with is the contract models that never really given high returns anyway, and I think the firms accepted that. I just think the issue that they've had with Iraq's financial difficulties mean it has struggled to make payments owed to these companies and to adhere sometimes to its own contracts which can reduce these margins even more. There are also issues with Iraq's layers of bureaucracy that can delay project progress, amongst other things, but you know, none of this is anything that's new.

Iraq and the IOC's have been at odds over these contracts for years, I think the defining factor that's actually helping create this shift is the energy transition. So a lot of these firms are streamlining or looking to streamline their portfolios and focusing on those assets that are value-driven rather than volume-driven. With that in mind, Iraq has quite a low margin, high carbon opportunities that are really going to struggle to find a place in those portfolios.

So we're starting to see that the oil ministry is taking steps to tackle this, the oil minister has started setting ambitious gas capture plans, offering net zero opportunities through solar projects, it's focused a lot more on direct negotiations rather than big licensing rounds, it's been securing US subcontractors, which is something that has appealed to TotalEnergies, which is looking to invest in for huge projects across the oil, gas and renewable space. And, you know, that actually includes a common seawater supply project, that will be key to boosting capacity. So Iraq is taking some steps forward here.

The key issue is: how durable is all of this? There are so many issues and uncertainties, you know, around internal factions and financial difficulties. So much of how this pans out actually rests on policies set by the new government, which is due to be voted in in October, and whether they continue some of this work that has already been done. It's certainly a space to watch to see how this develops. You know whether Iraq can keep these firms, especially those that are highlighting their discontent, but whether it can get near this goal of 8mn b/d in the next six years just depends so heavily on all of these moving parts.

Jim: Okay, thanks, Rowena. That's really interesting. I think the Total deal you mentioned as well is one that a lot of people are looking at - a really interesting set of projects that they're looking at there...We're out of time, really. So, thank you, again, Rowena for taking time to sort of talk to us about the forthcoming Opec meeting and also look at Iran and Iraq in a little bit more depth.

If you're interested in keeping up to date there in-depth Opec news analysis, then why not subscribe to Argus Global Markets or Petroleum Argus, or even both, and you can find out more information about these services at So, thanks for tuning in. And we look forward to you joining us again on the next episode of The Crude Report.

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