A highly-anticipated meeting of oil ministers from the Organization of the Petroleum Exporting Countries and some non-OPEC producers on Monday could make or break oil prices which have already tumbled more than 12% year to date.
“As always with OPEC, the most important attendees are Saudi Arabia and Russia,” said Eric Winograd, senior economist at AllianceBernstein. Saudi Arabia and Russia are two of the world’s largest crude producers and oil-exporting giants.
“Any sign that either is wavering in its commitment to the [production] quotas would have a large market impact,” said Winograd.
The gathering is really just routine for the Joint OPEC-Non-OPEC Ministerial Monitoring Committee, or JMMC—comprised of OPEC members Algeria, Kuwait and Venezuela as well as non-OPEC countries Russia and Oman—which was established late last year.
“The big players will most likely indicate that they will continue to live by the [output-cut] deal because if they don’t at least say that, then the deal falls apart and there could be a drop in prices,” said Winograd.
The group of oil ministers is tasked with monitoring implementation of the agreement that began Jan. 1 between 13 OPEC members and 11 non-OPEC producers to cut output by about 1.8 million barrels a day, in an effort to bring global supplies back to their five-year average.
The JMMC is supposed to analyze and make “recommendations, not decisions,” and not all OPEC members will be in attendance, said James Williams, energy economist at WTRG Economics. He said “the meeting could move the market—more from what is said on the sidelines rather than in the meeting.”
But the meeting comes at a precarious time for the oil market—one that’s facing a continuing rise in U.S. production, climbing output from Libya and Nigeria—two OPEC members that are exempt from the output curbs, and Ecuador’s decision to abandon its pledge to limit output.
When some of world’s largest oil producers came together two months ago, they made a move aimed at boosting prices, stretching the output-cut agreement through March of next year, past its original expiration at the end of June 2017.
And the monitoring committee said a month ago that OPEC and non-OPEC compliance with the agreement climbed to 106% in May, dubbing it the “highest conformity ever with their voluntary adjustments in production.”
“Recent compliance has been less than a few months ago,” but compliance “does not need to be 100% for [market] balance to improve,” said Brian Youngberg, senior energy analyst at Edward Jones. “There are numerous factors that go into oil prices, so I see little impact [from lower compliance], barring a major players openly saying they will defy.”
Even so, oil-producer efforts have failed to lift oil prices. West Texas Intermediate crude CLU7, -0.04% and Brent crude LCOU7, -0.06% have each lost over 12% from the last trading day of 2017, before the agreement took effect on Jan. 1.
Oil producers have, in recent months, proven their willingness to abide by the agreement. As prices continue to decline, however, compliance with the agreement has faltered and global supplies edged higher last month.
Global oil inventories climbed by 720,000 barrels a day to 97.46 million barrels a day in June because of increased output from OPEC and non-OPEC producers such as the U.S., the International Energy Agency Agency said in a report earlier this month.
“U.S. oil producers continue to find ways to earn adequate economic returns at lower oil prices,” said Rob Thummel, managing director and portfolio manager at Tortoise. “Therefore, U.S. oil production will continue to increase.”
If prices continue to trend lower and hold below $45 a barrel, however, that growth will “moderate,” he added.
For OPEC, it has been an uphill battle to balance the oil market’s supply and demand.
And rising production in the U.S. isn’t the only factor to blame. Growing output from OPEC-members Libya and Nigeria, which don’t have output limits under the pact as they attempt to recover production lost to civil unrest, have worked to offset efforts toward market balance.
Kuwait’s oil minister has reportedly said that the two African nations may soon be asked to limit their production. There is also speculation that Saudi Arabia is considering a 1 million-barrel cut to its oil exports to offset the output rise in Libya and Nigeria.
“Libya and Nigerian production will be discussed at this [committee] meeting,” said Thummel. “If production levels from these countries can be sustained, then I would expect the compliance committee will ask them to cap production.” Libya is expected to offer its output plans at the gathering, according to reports.
OPEC-member Ecuador, meanwhile, has said it can no longer afford to curb production.
While the country is one of OPEC’s smaller producers, its move raises concerns that other nation’s will follow its lead.
Given that backdrop, Michael Lynch, president of president of Strategic Energy & Economic Research, said he believes Monday’s meeting will primarily “focus on exhorting everyone to ‘stay the course’ and argue that the market balance is improving.”
The committee may urge Libya and Nigeria to “moderate” their production, but most likely won’t assign specific numbers to those countries just yet, said Lynch.
All told, analysts expect to hear a lot of talk from the meeting, but don’t expect any concrete moves.
After the meeting is done, “the next question on oil traders’ minds is what will OPEC do in March 2018 when the current agreement expires,” said Thummel.
“OPEC will need to maintain production at current levels post March 2018 for a while,” he said. “The sooner that OPEC articulates this the better it will be for oil prices.”