On May 25, the members of the Organization of Petroleum Exporting Countries (OPEC) will meet in Vienna to address the ongoing oil glut, i.e., the continued overproduction of crude oil relative to demand. Many market participants believe the oil market is nearing balance, but only because of the current agreement between OPEC and Russia to cut production by about 1.8 million barrels per day. “Due to the direct involvement of Russian Federation President Vladimir Putin in making Russia a de facto member of the cartel, we are tempted to rename it BROPEC,” said Matthew Peterson, SVP at LPL Research. That agreement, made in November 2016, is about to expire, and the prospect of its extension is the primary agenda item for the May 25 meeting.
As is typical before this type of meeting, there have been a series of announcements, leaks, and hearsay regarding the outcome. The general consensus is that the production cuts will at least continue, perhaps for another nine months, and perhaps even go deeper than the current 1.8 million barrels per day.
The key player in OPEC is Saudi Arabia, which has borne the majority of the cuts and is producing oil far below its capacity, as shown in the chart below. Although Saudi probably has the lowest cost of production of any oil producer (the data are a closely guarded state secret), it relies heavily on oil revenue to provide basic services for the country. “The Saudis are clearly playing a long game,” noted Peterson, “But they are also in the initial public offering (IPO) process to sell shares of Aramco, the state-owned oil company. The sale would go much smoother, and close much sooner, if the price of oil remained stable in the $50 range.”
Saudi is also attempting to strengthen its leadership position in the region relative to its arch-enemy Iran. President Trump’s recent visit to the country was also evidence of how Saudi is portraying itself on the global stage. For the Saudis, oil has always been an instrument of foreign policy and it continues to be so now.
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