This article was originally published on Nadex.com.
While the very first subject covered on June 22 at the Russia/OPEC meeting in Vienna may be the 5-0 thrashing Russia put on Saudi Arabia in the world cup, it may not be the most contentious. In the most anticipated meeting since the production cut was agreed to in November of 2017, Saudi led OPEC and other non-OPEC crude-producing countries led by Russia will try to agree to an increase in production. Based on reports, the allies seem to be far apart. Brent crude had gotten above $80 and WTI above $72 prior to the rumors of a proposed increase hitting the markets, and they have since fallen -9.2% and -11.6% respectively. According to reports, Saudi Arabia is looking to increase production by about 300,000 barrels a day and Russia is looking for around 1.8 million more barrels. The market is currently pricing a result somewhere in the middle, but that may not be enough given the well-documented decline in production in Venezuelan and the recent trouble with Libyan production. Internal fighting in Libya has caused an unexpected decrease in supply of about 240,000 barrels per day (bpd), with the oil ports of Ras Lanuf and Es Sider being closed and evacuated on Thursday.
Anything less than an increase of 800,000 bpd is likely to send the crude oil market higher and this is where the gap lies. While the inventory glut has been eliminated in crude leaving room for an increase, geopolitics consisting of the trouble mentioned above will take center stage. In addition, disruptions in Nigerian production (Nigeria fell below Angola as Africa’s largest produce last month with a decline of 114,000 bod), the proxy war between Saudi Arabia and Iran in Yemen, effects of new U.S. sanctions on Iran and the effects of a potential global trade war, it’s difficult to predict the bpd increase to be announced. The likely result is the headline figure doesn’t matter as much as the way it is to be implemented. Whether it’s a monthly ramp up or a one time increase to be reassessed in future, more frequent meetings, the schedule of the increase will decide price direction. Consider that on Friday, Russian oil minister Alexander Novak said Russia and OPEC had reached a general consensus with Saudi Arabia that the countries should "institutionalize" their relationship in order to monitor the crude oil markets and act if needed. To us, this says more meetings and more active management of the only thing that can compete with growing U.S. production; a permanent OPEC Russia alliance. Lower crude price in the short-term is our call.
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