From Bloomberg
When OPEC and its allies gather in the Saudi Arabian city of Jeddah this weekend, their conversation will be dominated by a member of the group that isn’t there: Iran.
As U.S. President Donald Trump squeezes oil exports from the Islamic Republic with sanctions, the discussions among other producers such as Saudi Arabia and Russia will likely focus on whether they need to fill a resulting supply gap. Their talks take place amid flaring political tensions in the Middle East, where Riyadh says its oil tankers and pipeline network were attacked this week.
“It’s a critical issue,” said Ed Morse, head of commodities research at Citigroup Inc. in New York. “This is a very tight physical market which is confronting significant losses of supply, and seeing signs of potential disruption in the Persian Gulf.”
Oil prices, holding near $72 a barrel in London (Brent), could easily climb this summer as global supplies are strained by Trump’s crackdown on Iran and simmering geopolitical tensions from Venezuela to Libya. But as opening the taps too soon could instead send prices crashing, Riyadh and Moscow face a dilemma over their next move.
“They should keep supply on a leash for now,” said Derek Brower, a director at consultant RS Energy Group Inc. “The market wants OPEC to recognize that balances will weaken later this year, and also next year.”
The two oil giants are spearheading a coalition known as OPEC+, made up of producers from the Organization of Petroleum Exporting Countries and beyond, which has been restraining output this year to keep world markets balanced. A committee including all major members except Iran will review market conditions on Sunday before the full group meets next month.
As the White House tightens its crackdown on Iran’s oil sales, Saudi Arabia is under pressure to compensate by raising its crude production. Trump tweeted on April 26 that he’d secured the kingdom’s pledge of co-operation.
Iran’s oil output has tumbled more than 30% since last May, data complied by Bloomberg show, when Trump abandoned an agreement on the country’s nuclear program and announced that financial sanctions would be re-imposed. Production could plunge further this month, to the lowest since the Iran-Iraq war in the 1980s, the International Energy Agency predicts.
Nonetheless, a decision by the Saudis and Russia to shift from restraining supply to boosting it isn’t straightforward.
There’s still no clarity on whether Iran’s biggest customer, China, will flout the U.S. ban and thus how far output will ultimately fall. Saudi Arabia is reluctant to repeat its experience of last year, according to Citigroup’s Morse, when it ramped up production in anticipation of a shortage that never arrived.
Record Levels
Riyadh bolstered output to record levels last autumn as U.S. officials promised to completely choke off Iranian supplies, only to see prices crash 35% in the fourth quarter as the Trump administration allowed some flows to continue. Saudi Arabian Energy Minister Khalid Al-Falih said late last month that while the kingdom will ultimately accommodate Iran’s customers, it’s not going to rush.
“The Saudis have been very conservative when it comes to adding barrels to the market,” said Mohammad Darwazah, a director at Medley Global Advisers in New York. “Saudi policy makers will certainly have a difficult needle to thread as they balance U.S. pressure to replace Iranian barrels with their own fiscal needs.”
A Saudi move to increase production substantially, and in the process take away Iran’s customers, could also be a severe test of OPEC’s unity.
OPEC+ nations are currently bound by limits on their output which run until the end of June, when the agreement could either expire or be renewed. Saudi Arabia is entitled to raise production by about 500,000 barrels day from last month’s levels, or about 5%, and still remain within its agreed restrictions.
But losses in Iran stand to be much larger, potentially spiraling to 900,000 barrels a day according to Goldman Sachs Group Inc., and could require a bigger and more contentious surge from the kingdom.
Such a move is unlikely to be formally ratified when OPEC+ convenes in late June, as the group’s agreements require unanimous approval and Iran would withhold its support.
Saudi Arabia, Russia and others with idle production capacity could proceed regardless, but risk straining already tense relations in the group to breaking point. Iranian Oil Minister Bijan Namdar Zanganeh warned on May 2 that OPEC is headed for a collapse.
‘Pretty Clear’
“It is pretty clear that Iran will not sign on for any OPEC output increase beyond current quotas,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC. “In the current context, Saudi plans to backfill the Iranian barrels may be viewed as acts of economic warfare.”
If this weekend’s deliberations could be difficult, OPEC’s ministerial meeting next month, when Iran will be present, is set to be much tougher.
While the cartel has weathered a range of internal conflicts over its six-decade history, recent tensions have been particularly acute. Friction between Riyadh and Tehran pushed talks at two meetings to near-breakdown last year, and in December Qatar quit the organization after 57 years of membership amid a dispute with the Saudis.
“I can imagine the June meeting being postponed” or “not having a consensus vote — not even having a consensus trying to be reached,” said Citigroup’s Morse.
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MY TAKE: Saudi Arabia needs $80 Brent to balance their budget. They won't move to abandon the quota system in place. They might raise their overall production a bit because (a) they are way below their quota and (b) the kingdom consumes more oil in the summer because they burn it to generate electricity. As I said at our luncheon on Monday, the "Right Price" for WTI is now $65 to $75.
Global Oil Market - May 17 Update from Bloomberg
Global Oil Market - May 17 Update from Bloomberg
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Global Oil Market - May 17 Update from Bloomberg
LONDON/OSLO (Reuters) - Iran's elite Revolutionary Guards (IRGC) are "highly likely" to have facilitated attacks last Sunday on four tankers including two Saudi ships off Fujairah in the United Arab Emirates, according to a Norwegian insurers' report seen by Reuters.
The UAE, Saudi Arabia and Norway are investigating the attacks, which also hit a UAE- and a Norwegian-flagged vessel.
A confidential assessment issued this week by the Norwegian Shipowners' Mutual War Risks Insurance Association (DNK) concluded that the attack was likely to have been carried out by a surface vessel operating close by that despatched underwater drones carrying 30-50 kg (65-110 lb) of high-grade explosives to detonate on impact.
The attacks took place against a backdrop of U.S.-Iranian tension following Washington’s decision this month to try to cut Tehran's oil exports to zero and beef up its military presence in the Gulf in response to what it called Iranian threats.
The DNK based its assessment that the IRGC was likely to have orchestrated the attacks on a number of factors, including:
- A high likelihood that the IRGC had previously supplied its allies, the Houthi militia fighting a Saudi-backed government in Yemen, with explosive-laden surface drone boats capable of homing in on GPS navigational positions for accuracy.
- The similarity of shrapnel found on the Norwegian tanker to shrapnel from drone boats used off Yemen by Houthis, even though the craft previously used by the Houthis were surface boats rather than the underwater drones likely to have been deployed in Fujairah.
- The fact that Iran and particularly the IRGC had recently threatened to use military force and that, against a militarily stronger foe, they were highly likely to choose "asymmetric measures with plausible deniability". DNK noted that the Fujairah attack had caused "relatively limited damage" and had been carried out at a time when U.S. Navy ships were still en route to the Gulf.
Both the Saudi-flagged crude oil tanker Amjad and the UAE-flagged bunker vessel A.Michel sustained damage in the area of their engine rooms, while the Saudi tanker Al Marzoqah was damaged in the aft section and the Norwegian tanker Andrea Victory suffered extensive damage to the stern, DNK said.
The DNK report said the attacks had been carried out between six and 10 nautical miles off Fujairah, which lies close to the Strait of Hormuz.
SENDING A MESSAGE
Iran has in the past threatened to block all exports through the Strait of Hormuz, through which an estimated fifth of the world's oil passes.
According to DNK, it was highly likely that the attacks had been intended to send a message to the United States and its allies that Iran did not need to block the Strait to disrupt freedom of navigation in the region.
DNK said Iran was also likely to continue similar low-scale attacks on merchant vessels in the coming period.
Iranian officials and the Revolutionary Guards' (IRGC) spokesman were not available for comment.
Tehran had already rejected allegations of involvement and Iranian Foreign Minister Mohammad Javad Zarif had said that "extremist individuals" in the U.S. government were pursuing dangerous policies. No one claimed responsibility for the attacks.
DNK's managing director Svein Ringbakken declined to comment, except to say that "this is an internal and confidential report produced to inform shipowner members of the DNK about the incidents in Fujairah and the most likely explanation".
The UAE has not blamed anyone for the attack.
Two U.S. government sources said this week that U.S. officials believed Iran had encouraged Houthi militants or Iraq-based Shi'ite militias to carry out the attack.
In a joint letter seen by Reuters and sent to the U.N. Security Council on Wednesday, the UAE, Saudi Arabia and Norway said the attacks had been deliberate and could have resulted in casualties, spillages of oil or harmful chemicals.
"The attacks damaged the hulls of at least three of the vessels, threatened the safety and lives of those on board, and could have led to an environmental disaster," the letter said.
Last month, the United States designated the entire IRGC as a terrorist organization. Washington had previously designated entities and individuals connected with the IRGC, which controls vast segments of Iran's economy.
Tehran responded by designating the regional United States Central Command (CENTCOM) as a terrorist organization.
The UAE, Saudi Arabia and Norway are investigating the attacks, which also hit a UAE- and a Norwegian-flagged vessel.
A confidential assessment issued this week by the Norwegian Shipowners' Mutual War Risks Insurance Association (DNK) concluded that the attack was likely to have been carried out by a surface vessel operating close by that despatched underwater drones carrying 30-50 kg (65-110 lb) of high-grade explosives to detonate on impact.
The attacks took place against a backdrop of U.S.-Iranian tension following Washington’s decision this month to try to cut Tehran's oil exports to zero and beef up its military presence in the Gulf in response to what it called Iranian threats.
The DNK based its assessment that the IRGC was likely to have orchestrated the attacks on a number of factors, including:
- A high likelihood that the IRGC had previously supplied its allies, the Houthi militia fighting a Saudi-backed government in Yemen, with explosive-laden surface drone boats capable of homing in on GPS navigational positions for accuracy.
- The similarity of shrapnel found on the Norwegian tanker to shrapnel from drone boats used off Yemen by Houthis, even though the craft previously used by the Houthis were surface boats rather than the underwater drones likely to have been deployed in Fujairah.
- The fact that Iran and particularly the IRGC had recently threatened to use military force and that, against a militarily stronger foe, they were highly likely to choose "asymmetric measures with plausible deniability". DNK noted that the Fujairah attack had caused "relatively limited damage" and had been carried out at a time when U.S. Navy ships were still en route to the Gulf.
Both the Saudi-flagged crude oil tanker Amjad and the UAE-flagged bunker vessel A.Michel sustained damage in the area of their engine rooms, while the Saudi tanker Al Marzoqah was damaged in the aft section and the Norwegian tanker Andrea Victory suffered extensive damage to the stern, DNK said.
The DNK report said the attacks had been carried out between six and 10 nautical miles off Fujairah, which lies close to the Strait of Hormuz.
SENDING A MESSAGE
Iran has in the past threatened to block all exports through the Strait of Hormuz, through which an estimated fifth of the world's oil passes.
According to DNK, it was highly likely that the attacks had been intended to send a message to the United States and its allies that Iran did not need to block the Strait to disrupt freedom of navigation in the region.
DNK said Iran was also likely to continue similar low-scale attacks on merchant vessels in the coming period.
Iranian officials and the Revolutionary Guards' (IRGC) spokesman were not available for comment.
Tehran had already rejected allegations of involvement and Iranian Foreign Minister Mohammad Javad Zarif had said that "extremist individuals" in the U.S. government were pursuing dangerous policies. No one claimed responsibility for the attacks.
DNK's managing director Svein Ringbakken declined to comment, except to say that "this is an internal and confidential report produced to inform shipowner members of the DNK about the incidents in Fujairah and the most likely explanation".
The UAE has not blamed anyone for the attack.
Two U.S. government sources said this week that U.S. officials believed Iran had encouraged Houthi militants or Iraq-based Shi'ite militias to carry out the attack.
In a joint letter seen by Reuters and sent to the U.N. Security Council on Wednesday, the UAE, Saudi Arabia and Norway said the attacks had been deliberate and could have resulted in casualties, spillages of oil or harmful chemicals.
"The attacks damaged the hulls of at least three of the vessels, threatened the safety and lives of those on board, and could have led to an environmental disaster," the letter said.
Last month, the United States designated the entire IRGC as a terrorist organization. Washington had previously designated entities and individuals connected with the IRGC, which controls vast segments of Iran's economy.
Tehran responded by designating the regional United States Central Command (CENTCOM) as a terrorist organization.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group