OPEC: Will they raise oil quota?

[dan_s]

Martijn Rats, CFA – Morgan Stanley
June 12, 2018 9:05 PM GMT

Historically, OPEC has rarely increased its quota unless production was already ahead. Also, the current quota is high enough to accommodate a large output increase. Hence, a quota increase seems unlikely. Still, production is likely to creep higher but only modestly as Iran and Venezuela weigh.

We expect OPEC to leave its production quota unchanged: OPEC oil ministers are scheduled to meet on 22 June, having largely achieved their stated objective of rebalancing the oil market. Yet, despite some indications to the contrary, we expect OPEC to leave its existing production ceiling unchanged. There are a few reasons for this:
First, OPEC has rarely - if ever - increased is quota unless production had already increased well beyond it. This is not the case currently.
Second, with the quota currently at 32.8 mb/d and production around 31.9 mb/d, there is already room to grow production by nearly 1 mb/d without an increase. Also, the consensus for the 'call on OPEC' in 2H is around 32.3 mb/d. This can be accommodated within the existing quota, and leave 0.5 mb/d headroom.
Third, OPEC tends to work by consensus, and 10 out of the 14 OPEC countries have little ability to increase production. These countries would likely lose market share in case of an OPEC quota increase and are therefore likely to argue against.
Fourth, OPEC's assessment in its Monthly Oil Market Report was somewhat downbeat, stressing risk to demand was to the downside and giving ammunitions to those who are in favour of keeping the ceiling unchanged.
Finally, we expect that OPEC will still be concerned about the lack of investment in long-term upstream projects outside the US, and will keep oil prices supported to facilitate a smooth market development in coming years.

Still, actual OPEC production is likely to creep higher in 2H but only modestly: Oil prices have already more than doubled since their early-2016 lows, and substantial further oil price strength in the short term is probably also not in OPEC's interest.

We expect that those with spare capacity - Saudi Arabia, Kuwait,
UAE and Iraq - will add ~500 kb/d by year-end,using around one-fifth of their
combined spare capacity. However, we expect Iran's and Venezuela's production
to decline by ~265 kb/d between May and Dec as US sanctions start to have an
effect (Iran) and the lack of investment and operational issues bite (Venezuela).
Altogether, we estimate a 'net' OPEC increase of just 260 kb/d by year-end.

Our balances continue to show stock draws in 2H; we see Brent supported at
$75-80/bbl: Oil demand typically accelerates 1.5 mb/d between 1H and 2H. With
the estimates above, OPEC will only fill ~0.1 mb/d of this and we expect Russia
to do the same. The US will grow strongly,adding 0.6 mb/d from 1H to 2H,and
Canada and Brazil combined are also set to add another 0.6 mb/d as well. Still,
with decline in a series of smaller countries of (0.3) mb/d, we estimate the oil
market to be undersupplied ~0.5 mb/d across 2H18. This should keep inventories
drawing, the forward curve in backwardation and flat prices supported.