Saudi Arabia may use a production cap to mend bridges with other OPEC members
Oil prices rebounded off of intraday lows today on news that OPEC may pursue a production cap in its meeting Thursday. OPEC did away with its official production ceiling in December of last year, a move many saw as the final nail in the cartel’s coffin. Saudi Arabia’s new oil minister, Khalid al-Falih, may try to reinstate a cap improve relations between OPEC’s members though, reports Bloomberg.
Falih, who took over from longtime oil minister Ali al-Naimi last month, will reassure other members that Saudi Arabia will not flood the market and may be willing to set an overall OPEC production target.
“It seems reasonable that the new Saudi Energy Minister Khalid Al-Falih may wish to start with a cleaner slate and improve the tonal dynamics inside OPEC,” said Bob McNally, head of consultant The Rapidan Group in Washington. “The bigger question is whether Iran would go along,” said the former senior White House oil official.
An agreement between OPEC and non-OPEC producers to freeze production at January 2016 levels failed when Saudi Arabia refused to take part without Iran. The Islamic Republic has repeatedly said it will not consider capping production below 4 MMBOPD following the end of international sanctions.
Will a production target save OPEC?
At the time the production freeze was announced in April, many analysts called it disingenuous, and the IEA’s Head of Oil Industry and Markets Division Neil Atkinson called it outright “meaningless.” The countries involved in the talks agreed to keep production at levels that still exceeded global demand, thus worsening the glut even as production growth ceased.
Where OPEC decides to peg its target will be important. If the group assumes Iran will reach 4 MMBOPD, and pegs the target at its current levels, markets will need to continue growing to absorb OPEC’s production. In April, OPEC produced 31.7 MMBOPD, according to secondary sources cited in the group’s monthly report.
“The OPEC meeting in Vienna on Thursday is unlikely to see a change in the policy of maintaining market share,” said Oxford Economics lead economist Patrick Dennis, prior to the report that output cuts could be on the table.
“Saudi Arabia can claim its policy has been successful with oil prices recovering at the same time as non-OPEC oil production has fallen back, leading to a more rapid global market rebalancing than expected.”
Even if a new production target proves to just be rhetoric, it may still be good news for oil prices. Brent crude prices have risen nearly 50% since multiyear lows seen in January, a process started by talks of a production freeze, and supported by unplanned outages around the globe. Even a nominal OPEC production cap may not save the organization.
