The Crude Report: Next steps for Opec+

Author Argus

As the fallout from Russia’s invasion of Ukraine continues to impact oil markets, Opec+ producers are restoring the last of the production cuts agreed in 2020 in the face of the Covid-19 pandemic. But with countries rich and poor struggling with rising fuel prices, the pressure is on to do more – especially with a high-profile visitor due in Saudi Arabia later this week.

In this episode of The Crude Report, our Middle East Editor Nader Itayim and Editor-in-Chief Jim Washer discuss where Opec+ output policy goes next, the alliance’s anxieties over limited spare capacity, and what to expect from US President Joe Biden’s forthcoming trip to the Mideast Gulf.

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Transcript

Jim Washer: 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 joining me once again from Dubai is our Middle East editor, Nader Itayim. Today, we're reflecting on last month's Opec meeting, where that leads the Alliance, given the current turbulence in oil markets, their output policy options beyond August, and also what influence Joe Biden's forthcoming visit to the Middle East might have. So, Nader, thanks for joining me today. And let's start by just recapping what happened at that meeting last month. What is it that Opec decided?

Nader Itayim: Thank you, Jim. Good to be here. Good to do this after a while. So, when it comes to the last Opec meeting, it was essentially a very run-of-the-mill meeting, a very quick meeting. They essentially did what we all expected they would do. They ratified the decision that they took at the previous meeting to bring back around 648,000 barrels per day, you know, of production back in August. That was interesting. And it's sort of a special moment here because that, in theory, means that with these incremental barrels will be 648,000 [inaudible 00:01:11] per day, they've effectively now come to the end of this two-year or so process of returning the near 10 million barrels per day of production that Opec and their non-Opec partners, Opec Plus that they removed from the market in May, 2020, you know, in response to the start of the Covid-19 pandemic and the collapsed in oil demand that came as a result.

Jim: Okay. So, where does that leave the group going into its next meeting?

Nader: Right. So, as I mentioned, the previous meeting was pretty easygoing. A large majority of these meetings, over the last, I don't know, six to nine months, they've pretty much been the same. They've essentially gone in there and rubber-stamped the decisions they'd taken previously. But the upcoming meeting, so I think it's early next month, that should really prove to be, I wanna say, exciting because it'll essentially be the meeting that they're gonna sit down and try to figure what comes next, what happens next for the group. So far, the policy moves have, to a large extent, always really been mapped out for them several months in advance. Each time they actually decided on policy, the regular [inaudible 00:02:20] on policy for, not just that month, in the month to the next month, but just three, four, five months ahead. But now with Opec members, theoretically, returning the last of the May, 2020 cut in August, the path is now kind of clear for them. It's a clean slate. Now, on the one hand, it's kind of a blessing in that they won't really be handcuffed by the quota system anymore. Sort of saying, you know, this country can bring on this much and this country can run that much.

But for the same reason, it could also be a curse and, I mean, I could say, expose, it could be a curse and expose them more than they already are. When I say expose I'm, of course, sort of talking about this much-discussed issue or problem of dwindling spare capacity. And that's not just within the Opec group, but, you know, globally, for a host of reasons. I mean, primarily the lack of investment, over the last few years, sanctions on some countries, domestic politics, and security issues in some countries. I mean, several members of this Opec Plus group, they've really failed to keep up with their quotas for much of the past, I don't know, six to nine months, which has contributed to, you know, the group really falling behind schedule when it comes to their monthly editions. This is why I said a little earlier that August will theoretically see the end of the process because, as of June, according to Argus's latest production survey, that came out last week, the group's overall output, or rather the overall production from these countries bound by the deal, it was lagging. I mean, we were around 2.5 million barrels per day below target.

Jim: Okay. So, we're at a bit of a crossroads here really. Are we getting any sense of what options on the table after August? Are we getting any insight on this from delegates?

Nader: Regarding what comes next, to be perfectly honest with you, I mean, we've been having conversations, we've been speaking to lots of delegates over the last few days and since last week, but we've really heard very little from them about what comes next. And it's a surprise. I mean, they were saying that it hasn't really been discussed. It wasn't brought up at the meeting. It hasn't, you know, even behind closed doors or just unilaterally, bilaterally, they're not really speaking about this kind of thing yet. And given really how much forward planning they've been operating with throughout the last few years, it really does come as a surprise to me. And a lot of people I spoke to this about. So, whether they have or not broached the subject, I don't know. But as far as what they're telling us, they haven't. It's gonna be tricky, for sure, specifically because of the spare capacity issue I mentioned.

Effectively, we're looking at a situation where, you know, in a group of 20 or so countries only a small handful really have any kind of genuine spare capacity to use up here. And the lion's share of that is with Saudi Arabia and the UAE, and to a much lesser extent, Kuwait. Assuming current production capacity of, say, 12 million barrels per day for Saudi Arabia, around 4 million barrels per day for the UAE, and say, 3 million barrels per day for Kuwait, we're looking at about 2.7 million barrels per day in total for all three of them. Having said that, we're also, I mean, mentioning the 12 million, 4 million, we're also talking about capacity levels that really neither of these countries have sustainably produced at for a period of time in the past. So, this would be, you know, new territory completely. So, there are some question marks there. Now, there's also, of course, Iran, that could comfortably bring on, say, around 1 million barrels per day or so in fairly short order, I mean, within, let's say, six to nine months. But obviously, Iran is under sanctions so they're not really part of the conversation at the moment.

Now, with these realities in mind, you'd think that these [inaudible 00:05:56] Gulf producers, the ones we mentioned, they'd really have to do most of the heavy lifting if Opec or Opec Plus were to decide, you know, any additional supply is needed over the coming few months, at least until the end of the year. There's no real way around that. But even so, I mean, my hunch here is that even if they do the heavy lifting, even if the majority, or the entirety of these additional barrels comes from these countries, any increase would really be done sort of under the guise of an Opec or Opec Plus increase rather than some kind of unilateral action. Preserving unity among the members of this Opec Plus group, it's really been the cornerstone of the success that they've had over the past few years. And Saudi Arabia, the UAE, I mean, these countries know that very well. And these kind of countries being seen to go it alone or being perceived to go it alone some way. I mean, that would really threaten that kind of unity. And it's really something they want to avoid.

Jim: Okay. You mentioned Iran, which I wanna come back to in a minute. But first of all, let's stick with this spare capacity issue because, into this situation, we have this week, the visit of Joe Biden to the Gulf, he's obviously worried about energy prices, rising gasoline prices at home, he's putting pressure on domestic producers to increase production. It's gonna be highly surprising if a similar message isn't shared with producers in the Gulf this week. How is that gonna influence things? What bearing is that gonna have on the path Opec Plus is gonna take now?

Nader: Right. So, there has been a lot said and a lot reported, over the last few weeks ahead of this trip. In short, I would say it could. Frankly, it could actually explain why the Opec Plus group decided to leave any conversations they had around what to do next, what to do post August until after the visit. I mean, Opec Plus is now meeting early August. So, I think that that could be behind, you know, that decision. I mean, this is really a Middle East trip. I mean, he's first heading to Israel and Palestine, first, before flying and going to Saudi Arabia. The U.S. has over the last, I don't know, nine months, one year, maybe more, it's really been one of the loudest voices pushing Saudi Arabia and Opec and Opec Plus to produce more and raise production more aggressively.

And Biden has, ahead of this trip, at least, he's repeatedly said that, you know, his visit to the kingdom is about more than just energy or just, you know, more than asking for additional supplies from the region. He was asked whether he'd actually ask Saudi Arabia for more, in particular. He said, "No, he's not gonna ask Saudi Arabia, but he's gonna ask the GCC, the Gulf producers as a whole to consider raising production in the hope that they themselves will consider such a thing to be, you know, in their own interests." Now, on the energy side, in particular, personally, from where I'm standing, I think expectations really need to be managed for a number of reasons now. I mean, again, from where I'm standing, it doesn't look likely that Biden's gonna be securing any kind of major wins on this particular front.

Quite simply. I mean, the main reason here is because Saudi Arabia and the Opec Plus group as a whole, they've been making it abundantly clear to us and really anyone that'll listen, that it's not in their interest to be raising production unnecessarily and using up what little spare capacity they actually have and the world has unless absolutely critical. To them, higher prices, now, of course, it's a problem. But eroding what little spare capacity we have left is a much more serious issue that they frankly don't even want to contend with or have to worry about unless absolutely critical.

So, what I think we could be seeing, because it's obviously the optics are important here. And I think Biden would want to come out with something and they would like to, at least on both sides, look like they're coming out on the same page. I think what we could see is the commitment from Saudi Arabia and the GCC countries. But, you know, as Opec, I guess, Opec Plus to monitor the market and commit to taking action, if needed to, say, balance the market, you know, something like that. But, I mean, I don't expect more than that. On the oil side, in particular, the energy side, I think the U.S. has effectively gotten everything it would've hoped to get from the Middle East. I mean, largely, in the shape of the decision by Opec Plus a couple of meetings ago to essentially speed up the return of its production. The return of its barrels, speed it up by one month, expedite by one month.

So, for me, I mean, this trip is, as Biden keeps saying, it's more about energy. I think this is where it's other areas in which Biden hopes to actually get some of those wins. This trip is gonna be more about Israel and improving relations between Israel and other Middle East countries, Saudi Arabia, in particular. I mean, this would be high on the agenda for him. Obviously, the Gulf countries all have, a lot of them, at least have the same concerns, let's say about, Iran, when it comes to security. I think security will be high up on the list. And probably this is where Biden is gonna be focusing most of his efforts and hoping to get the most out of on this trip.

Jim: Okay. Well, you mentioned Iran, which I wanted to come back to. This seems to be drifting a bit, hope fading here a bit for the JCPOA. I mean, where do things stand on Iran at the moment?

Nader: I apologise in advance because it feels like I end up saying the same things every time we discuss the issue. But genuinely, it feels like we're still at this kind of dead end. We're at a situation where the actual negotiation process, which involved the Iranians, and the Americans, and the EU, and the other partners at JCPOA, were at least they were in the same city. And there was some kind of discussion, even if it was indirect. That process really ended in March. There was a hope that we could revive things and get things moving again soon after. But it seems like whatever momentum there was that quickly, just faded. And as time passed, the situation just kept getting worse and worse, and Iran kept raising the stakes. And the Americans, on their side as well, would add additional sanctions.

And the situation's just become more complicated.

There was a small ray of hope a couple of weeks ago, the EU, which has really been pushing to try and get these discussions over the line for quite some time now. Obviously, now with the situation in Russia and energy scarcity, and trying to actually establish some kind of energy security for the group with Russian barrels, sort of not really being part of the conversation as much now, as it was in the past. The Europeans have openly said that they would like some kind of a conclusion to these Iran talks and actually lifting sanctions from Iran. Because Iran, as I mentioned, has roughly 1 million barrels they could sort of bring to the market in a fairly short time, if the situation improves on that side and sanctions are lifted.

Now, the EU, on its part was trying to sort of revive things. Just [inaudible 00:12:51], the foreign policy chief went to Iran and got a commitment from both sides, to actually meet once again and to try and unblock, as he said, the negotiating process. Within a couple of days, talks were planned in Doha and Qatar, and quite quickly, everyone mobilized went to Qatar in the hope that maybe we could see some kind of movement on this front. Unfortunately, it had felt like the talks kind of ended before they even started. Shortly, after 24 hours in, from both sides, we started hearing really, you know, negative assessments of what had happened. On the Iranian side, they felt that the Americans came with nothing new. On the American side, they felt that the Iranians were coming out with new additional demands.

I mean, long story short, unfortunately, it doesn't seem like it's going anywhere fast. We have seen in the last couple of days that there has been some kind of diplomatic movement and action and buzz around Tehran. And the Iranians had a meeting with the Qataris and the Omanis in the hope that we may be we might actually have another round of talks soon and not wait another few months. But from what we're hearing from the American side, they're not convinced that...you know, unless something changes, they're not convinced that we can actually get something anytime soon. It just feels like both sides are not willing to budge to actually make this deal happen. So, as far as a return of [inaudible 00:14:13] barrels is concerned, I think we might have to wait a little bit longer for that.

Jim: Okay. We're getting close to time. But, you know, we can't really discuss Opec without mentioning the very, very sad news last week about Dr. Barkindo, the Opec Secretary-General, who died suddenly last week in Nigeria. He obviously has led Opec through a very, very difficult time, lots of challenges in terms of the Covid pandemic and then the latest turbulence around the Russia-Ukraine conflict, and has done so with great skill and diplomacy. How would you sort of sum up his achievements as Opec secretary-general?

Nader: Right. Thank you for bringing it up. I mean, absolutely it was incredibly sad news. Several days have passed and I still can't really get my head around it. I'm sort of in shock still. Mr. Barkindo was one of a kind. I've been covering Opec for, I don't know, 10, 12 years now. And obviously, I've been there since Mr. Barkindo's first day, obviously, he's been around the Opec scene for decades now. And it kind of showed whenever you used to speak to anybody about Mr. Barkindo. People are only saying the nicest things about him. And he was genuinely a very, very honest, very kind, genuine individual. And on a personal level, he will be missed. He was always good to people like myself, to all the journalists. And, you know, he'd refer to everybody as my friend and he'd make everyone feel really at home. And he'd really make time for you, even if we were asking him the tough questions.

So, on that level, on a personal note, you know, it was very sad news. And frankly, I just wanna give my condolences to his family, from us and to the Opec family, more generally. But, yeah, I mean, when it comes to his achievements, I mean, his achievements speak for himself. As you mentioned, he really kind of steered Opec through what are some really complicated times. Now, we talk about Opec Plus, and frankly, Opec Plus today, it's kind of a household name, at this point in time, at least in the energy world. And that's largely down to Mr. Barkindo's efforts over the last few years, really, from its inception of this idea of bringing in non-Opec. I mean, he was there, he was been driving this. I mean, he's done the miles. He had to really kind of guide this group of the 20-plus countries through a lot. And, I mean, this is his legacy. And I know that he was incredibly proud of, not only what he achieved, but what the group has been achieving. And frankly, all the success that it has had, I mean, I think it's fair to say is largely done to him.

Jim: Well said, Nader. Yeah. As you say, it's quite a legacy he's left behind after a very, very turbulent few years for the organization for the markets. Okay. Well, look, we should wrap up there I think. Thank you as ever for your time today. We've got an interesting few weeks ahead of us starting with that, that Biden visit. If you wanna keep up-to-date with our coverage of Opec news and analysis, then why not subscribe to Argus global markets, or petroleum markets, or both of them indeed. And you can find more information on these services at www.argusmedia.com. So, thanks for tuning in, and we look forward to you joining us on the next episode of "The Crude Report."

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