Oil prices ran into a brick wall on Thursday, falling more than 1 percent on news that U.S. inventories jumped and OPEC may be considering an exit from its production cuts.
Reuters reports that some OPEC officials are privately rethinking the extension of their production cuts beyond June. To date, the prevailing consensus has been that OPEC+ would need to keep the cuts in place through the end of this year in order to rebalance the market.
But the swiftness of the rebalancing effort has surprised most analysts, and has even surprised OPEC itself. Of course, while the group has kept 1.2 million barrels per day (mb/d) off of the market since the start of this year (give or take), U.S. sanctions have knocked even more supply offline in Venezuela and Iran. In March, Venezuela’s oil production plunged by 289,000 bpd, falling to just 732,000 bpd, according to OPEC’s secondary sources. It’s a staggering figure. The widespread blackout, the economic and political crisis, and harsh U.S. sanctions have crushed Venezuela’s oil sector.
Meanwhile, Iran’s output has held up a bit better, but has still suffered from significant declines since last year. The expiration of waivers that the U.S. granted to eight countries importing Iranian crude expires in just a few weeks. As of now, Trump officials appear to be split on whether or not to take a hard line by letting the waivers expire.
In a sign of how hawkish the Trump administration has become, Secretary of State Mike Pompeo is now viewed as being at the softer end of the spectrum in regards to Iran policy. Pompeo has a long reputation as a hardliner on Iran, so the fact that his department is the one trying to moderate White House policy is telling. Notably, Pompeo’s State Department is worried about rattling the oil markets if the administration is too aggressive on Iran, according to Bloomberg.
Meanwhile, OPEC is watching all these events very closely. Saudi oil minister Khalid al-Falih has repeatedly suggested in recent months that the OPEC+ production cuts would likely be extended. The group seems to want to err on the side of overtightening, especially after last year when OPEC+ abandoned the production cuts and the oil market crashed.
This time around, OPEC+ will have the benefit of being able to react after the mercurial U.S. President makes a decision on Iran sanctions waivers. The surprise issuance of waivers last year is one of the main reasons why prices crashed in the fourth quarter.
If the U.S. takes a hard line, and knocks more Iranian supply offline, and Venezuela continues to see supply losses mount, OPEC could decide to increase production from current levels, according to Reuters. That report follows comments from Russian President Vladimir Putin a few days prior that seemed to suggest that Russia is growing wary of keeping supply off of the market. Putin said that he does not support an uncontrolled increase in prices. Russian energy minister Alexander Novak added that there would be no need to for an extension of the cuts if the market had reached a balance.
Meanwhile, on Wednesday, the EIA also reported another surprise uptick in crude inventories. Taken together – Russia’s skepticism, U.S. inventories and now the possibility that OPEC would consider a production increase – the news took the steam out of the recent rally in prices. “Now there is a suggestion that OPEC may surprise us and raise production pre-emptively if we get a price spike,” Phil Flynn, an analyst at Price Futures Group in Chicago, told Reuters.
Still, no decisions have been made and nothing is inevitable. In a sign that members of the OPEC+ coalition are not all on the same page, the UAE’s energy minister Suhail bin Mohammed al-Mazroui seemed to try to tamp down speculation that Russia was losing the will to cooperate. “Russia will not increase its output unless in coordination with the rest of OPEC and OPEC+ countries,” Mazroui said. “I believe in the wisdom of Russia, and I believe that Russia has benefited from this agreement... I don’t see any reason for Russia not to continue with us.”
The higher oil prices rise, the more the cracks in the cooperative arrangement will emerge. All it will take is another supply disruption in Iran, Venezuela or Libya to kill off the deal.