Vienna Summit: the meeting to decide the fate of the production cut deal

Many speculate about the future ofthe production cut deal ahead of the Vienna Summit

By Joaquin Robles

14/06/2018

XTB Analyst

The OPEC has continued to feed speculations regarding the decision it will make during the upcoming Vienna meeting next week, especially given strong oil demand and the foreseeable drop in supply.

There is a wide range of forecasts regarding the amount of crude that the Organization of Petroleum Exporting Countries needs to produce during the second half of the year. The medium estimate stands at 1.7 million barrels per day. However, it is highly difficult to establish a point of balance ahead of the Vienna summit.

Vienna Summit

The OPEC and its allies are in for a difficult summit in Vienna next week. Saudi Arabia – under pressure from U.S. President Trump – is seeking to reinvigorate production in order to prevent higher prices. Russia has also favored an increase. Nonetheless, there is growing resistance among countries with little margin to raise production, including Iraq, Iran, and Venezuela.

Saudis and Russians have been leading a coalition of 24 OPEC and non-OPEC producers since early 2017. Supply cuts have already managed to reduce the supply glut, which will likely be highlighted at the summit. Oil stocks are dropping below the five-year average for the first time since 2014.

Under the terms of the current agreement, production cuts are set to continue until late 2018. Virtually no changes have occurred since the last monthly report. The cartel’s leading forecast indicates that the OPEC will need more crude in order to meet global demand. However, the group also highlighted the uncertainty of this estimate days before the Vienna summit.

The OPEC’s 14 members must produce an average 33.34 million bpd during the second half of 2018. This is considerably higher than the 31.87 million production recorded last month, according to the report. Meanwhile, Venezuelan production continues to decline in the midst of its economic crisis and fell to 1.39 million bpd in May. In view of this, there are speculations that the country could abandon the OPEC.

Saudi Arabia and Russia

However, current global risks could reduce the demand, especially as economic growth is losing steam in the major economies. Another influential factor is that fuel subsidies could be eliminated and consumers may abandon oil and resort to natural gas. Also, there is a chance of an even faster economic growth, mostly driven by competing producers like the U.S., Canada, and Brazil.

In spite of the uncertainties, Saudi Arabia and Russia seem to already be in the process of increasing output. Thus, the summit could be the end of almost 18 months of production cuts.

As Saudi Arabia told the organization, last month it increased production to over 10 million bpd for the first time since October. For its part, Russia increased crude supply to the highest level recorded in 14 months. This occurred during the first weeks of June, as several companies breached their production limits.

For more related information, visit Energía16.

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