OPEC to Consider Easing Oil Cuts Amid Middle East Tensions - The Wall Street Journal

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Summer Said
The Wall Street Journal
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Benoit Faucon

May 17, 2019 10:53 a.m. ET

JEDDAH, Saudi Arabia—OPEC and its allies are set to debate a potential increase in crude output at a meeting here on Sunday, as they attempt to balance global oil supply amid regional tensions on a scale the Persian Gulf hasn’t seen in over a decade.

The gathering of delegates from a few key producers including Saudi Arabia and Russia will commence nearly a week after two Saudi tankers were sabotaged in an incident some U.S. officials have blamed on Iran, and days after Houthi rebels claimed responsibility for an attack on a Saudi pipeline. Saudi Arabia’s Vice Minister of Defense Prince Khalid Bin Salman said Friday that the Houthi attacks against oil stations this week were ordered by Tehran.

The incidents have raised fears of a military conflict between the U.S. and Iran. The U.S. has built up its naval presence in the Persian Gulf in recent weeks and ordered a partial withdrawal of its diplomats from Iraq on Wednesday. In the past month, the Trump administration has tightened sanctions on Iran with the aim of reducing the country’s oil exports to zero.

Those developments have stoked anxieties about supply disruptions in a region that contains much of the world’s spare capacity. Tensions in the Middle East are at their highest level since 2008, when Israel threatened to bomb Iran over the country’s nuclear program.

Saudi Arabia’s Energy and Industry Minister Khalid Al-Falih. Photo: lisi niesner/European Pressphoto Agency

Despite the recent tension, both Brent crude, the global benchmark, and WTI crude futures have risen more than 3% this week, shrugging off global trade-related concerns about shrinking demand.

Saudi Arabia and its close ally the U.A.E. have been careful not to create friction with Iran, a regional rival and fellow member of the Organization of the Petroleum Exporting Countries. But President Trump is pressing OPEC to pump more oil to replace banned Iranian crude and lower oil prices, according to senior Gulf oil officials.

“Gulf producers will have to strike a balancing act between satisfying Trump’s demands for extra oil…and not having Iran be a flamethrower at the next OPEC meeting,” said Helima Croft, the chief commodities strategist at Canadian broker RBC.

Indeed, an OPEC meeting in December nearly collapsed when Iran’s oil minister, Bijan Zanganeh, threatened to leave the organization it helped create almost six decades ago. Despite the acrimony, OPEC and its Russia-led partners agreed to output cuts of 1.2 million barrels a day that have led to a rebound in oil prices this year.

Many producers—chiefly Saudi Arabia—have cut production at a greater rate than originally agreed. In April, the coalition reduced output by 440,000 barrels a day more than agreed, according to the International Energy Agency.

As a compromise, OPEC is now considering a plan to allow countries the flexibility to pump more oil, as long as they remain within the boundaries of the December deal, said a person who will attend the meeting.

The Jeddah meeting isn’t expected to conclude with a final decision on output. Iran won’t be represented but its supply risk is expected to be widely scrutinized, the officials said.

The meeting could end with a set of recommendations for the second half of the year to be considered at a planned June summit in Vienna, according to OPEC officials.

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“Most likely the Jeddah summit will make a recommendation that participants should comply 100%” with the December agreement and not more, one OPEC official said.

Returning to full compliance would provide scant relief to U.S. consumers, an OPEC official said, as the extra oil would mostly be consumed by the Saudis themselves. The kingdom boosts its production to supply power stations used for air conditioning in the summer.

The compromise also means prices would likely remain around current levels of roughly $70 a barrel—close to the level most OPEC members need to balance their budgets. The Saudis “like the $70 level, and think this is a level that gets Trump off their back,” said a Saudi official.

—David Hodari in London contributed to this article.

Write to Summer Said at summer.said@wsj.com and Benoit Faucon at benoit.faucon@wsj.com

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2019-05-17 14:53:00Z
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