- OPEC is expected to ultimately agree to raise production along with Russia and other producers after they meet this week, and analysts expect to see a more volatile atmosphere for prices as a result.
- Demand is strong, and even with increased production, analysts say there could be a supply shortage.
- There are a wide range of views on how much oil a divided OPEC will agree to return to the market, and that too could bring volatility as markets react to this week's separate meetings of OPEC and OPEC, Russia and other producers.
OPEC is expected to agree to open its spigots at what could be a contentious meeting, and the very process of adding more supply to the global oil market could create fresh volatility around oil prices.
The Organization of Petroleum Exporting Countries meets this week in Vienna and holds a formal meeting Friday. OPEC members are expected to agree to raise production, ahead of a meeting with Russia and other non OPEC producers, where they would seal the deal.
Already, OPEC members do not all agree on how much oil should be returned to the market, and Russia also apparently has its own view, stating over the weekend that OPEC would consider returning 1.5 million barrels to the market for the third quarter only, when demand is high.
Credit Suisse analysts said in a report on Sunday, "Importantly, OPEC needs a consensus of all members to officially change its output policy, leading some to believe it may end in a 'broken meeting.'"
Analysts say Saudi Arabia would like to initially return just 500,000 and watch the market before adding more, while Iran and Venezuela want to keep the status quo.
"There's a big push to get more oil on the market in this Q3 period, so they can avoid a price spike and tightness in the market," said John Kilduff of Again Capital. Oil use inside of Saudi Arabia rises sharply in the summer months, as the kingdom burns crude to meet its higher electricity demand and it typically sends less to the world market. That coincides with the tail end of the U.S. summer driving season, another big period for stronger demand.
Oil prices have already been swinging ahead of the OPEC meeting. Brent crude, the international benchmark, rose above $75 per barrel on Monday, a gain of better than 2.7 percent, after falling sharply on Friday. Oil moved higher on a news report that OPEC could raise production by 300,000 to 600,000 barrels a day, less than many expected.
"Here they are moving into summer term, which is a high-demand quarter, and now they want to basically make sure that the decision that they make in the June meeting does not involve basically taking oil prices once again towards $80 or above because that could potentially basically counteract what they had initially done, [which] was to balance the market," said Abhishek Deshpande, J. P. Morgan's senior oil analyst, on CNBC's Power Lunch.
OPEC has to walk a careful tightrope on oil prices, because if they are too high, demand could fall off.
Analysts who watch OPEC also don't agree on how much oil could come back on the market. Macquarie Research said the events in Vienna this week could be bearish, or negative for oil , and it expects an 800,000 barrel a day increase in production, which could dent prices by $2 to $4 a barrel. There could be a $6 to $8 decline if 1 million barrels a day were returned instead, they added.
"In our view, any production increase effectively signals that the cuts have an end date. In
contrast, our recent discussions with clients indicated a growing view that the cuts
may last through 2019 and perhaps beyond 2020," the Macquarie analysts wrote, noting that forecasts could have to change to include more barrels in production.
Goldman Sachs, on the other hand, said this week could bring on a bullish, or positive, surprise for oil prices. It expects OPEC and Russia to agree to put 1 million barrels a day back into the market in the second half of the year.
Goldman said the market is implying a 4 percent move in Brent prices between Friday, when OPEC meets, and the following Monday, after OPEC, Russia and others meet Saturday. Brent is sometimes more responsive to OPEC than U.S. West Texas Intermediate, though it often moves in tandem. WTI was up 1.1 percent at $65.79 a barrel Monday.
"Despite little clarity on the outcome of this meeting, this implied move is in line with the average of the past nine OPEC meetings, including three meetings since 2016 that were unconsequential. This suggests that the option market may be underpricing the event risk," the Goldman analysts wrote.
Credit Suisse analysts said in their report that, given President Donald Trump's complaint about high oil prices, "We could see a release of reserves from the Strategic Petroleum Reserve (bearish), particularly in front of Nov elections."
In December, 2016, OPEC and Russia, and other producers, struck an unprecedented agreement to remove 1.8 million barrels a day from the world market to steady prices and end a staggering oil glut. That plan succeeded in wiping out the oversupply and sending prices of Brent crude to as high as the low $80s a barrel.
But the steps to reverse that will be tricky. As OPEC, responsible for 40 percent of world oil supply, and Russia, the world's largest producer, look to move away from the deal, they will have to carefully calibrate the changes against a list of variables.
For instance, there is an anticipated loss of supply coming in the next couple of months from Iran as the U.S. reimposes sanctions, and Venezuela's production continues to deteriorate. Iran could be down as much as 500,000 barrels a day by the end of the year.
At the same time, global demand is strong and rising, but analysts differ on how much it is increasing. Meanwhile, the U.S. is a wild card, increasing production continuously, and output could reach 11 million barrels a day soon. The U.S. has already surpassed Saudi Arabia to become the world's second largest producer.
"Most definitely it's not unified right now. I think the bigger players are the stronger players," said Deshpande. Both Russia and Saudi Arabia, which helped bring Russia into the OPEC deal, say the Russian relationship will be "institutionalized." The leaders of Saudi Arabia and Russia met last week on the sidelines of the World Cup ahead of this week's meetings.
"Saudi Arabia and Russia clearly see the bigger picture," he said. "They do want to bring in those extra barrels, which have to help balance otherwise a decline seen from Venezuela, Angola or even potentially what you might see from Iran in the future."
Kilduff said the discipline shown by OPEC in making the supply cuts may not be repeated when they try to return oil to the market.
"They always overshoot with this stuff, and when they get too cute by putting out these arbitrary time frames, they usually burn themselves, and the market forces their hand and they have to react," said Kilduff. "This is when it gets dicey."
Kilduff speculated that OPEC countries alone could return 500,000 and Russia could separately add a few hundred thousand barrels.
Francisco Blanch, global head of commodities and derivatives research at Bank of America Merrill Lynch, said he expects OPEC to slowly return oil to market, adding just 200,000 barrels a day every quarter through the end of next year.
Blanch said that would support prices because of the slight deficit in the market.
Macquarie even with its forecast for 800,000 barrels, says a 500,000 barrels a day deficit expected in the third quarter would shrink to 300,000 barrels per day.
Analysts have varied views on demand as well. The International Energy Agency puts demand at 1.4 million barrels a day for this year and same as next year.
But Goldman analysts see higher demand growth, at 1.75 million barrels a day this year.
But they note with the anticipated decline by some producers that would leave the production gain at 45 million barrels a day, even with the anticipated 1 million barrels a day restored to the market.