Saudi and Iran clash could ruin Opec’s party plans

Opec ministers head to Vienna this week for the 173rd meeting of the Organisation of Petroleum Exporting Countries. Global benchmark Brent crude prices are up almost 20% since the last meeting on May 25, 2017, while those for West Texas Intermediate — the US benchmark — (WTI) are up about 10%.

Thursday’s gathering is likely to have a different tone than the last two Opec meetings because global oil demand has strengthened, inventories have tightened, prices are on the rise and trading technicals appear bullish.

Bullish oil price dynamics should please Opec members, but like all large gatherings of colleagues at this time of year, some inter-office drama could spoil the party. Geopolitical tensions between Iran and Saudi Arabia are the highest in more than a year.

This could spill over into the negotiating room, and dash traders’ hopes of additional Opec and non-Opec agreements to extend oil production cuts.

Without additional an extension of oil production cuts — or at least without a significant extension — oil prices could come under some short-term pressure. The IMF has revised up its global growth outlook, and eurozone and US manufacturing surveys have been on a tear. There have also been important improvements in China, where the manufacturing survey has shown an impressive rebound from a manufacturing recession between December 2014 and June 2016.

Improved Chinese growth and manufacturing have contributed to increased oil demand and higher oil prices. Opec will also be looking at the efficacy of its policy of curtailed oil output. And they are likely to be pleased.

The stronger outlook for global demand has been accompanied by a drop in Organisation for Economic Co-operation and Development (OECD) inventories, which are now closer to the five-year average.

This return to average levels has been what Opec members have euphemistically referred to as the “rebalancing” of global inventories. And it means that the levels of reduced oil production have been effective.

Extending the Opec production agreement — and the requisite co-ordination between countries — could be threatened by geopolitical tensions between Iran and Saudi Arabia.

Just last week, the Crown Prince of Saudi Arabia called the Supreme Leader of Iran “the new Hitler of the Middle East.” The choice of comparison just days before heading to Austria — the country where Hitler was born — may be a coincidence, but it is a bad omen.

Bloomberg

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