"OPEC is caught between a rock and a hard place"
Amid tensions between the world’s largest oil producers, Professor Michael Tamvakis, Professor of Commodity Economics and Finance, Director, MSc in Energy, Trade and Finance, explains why the forthcoming OPEC meeting is going to be a particularly difficult one.
"The forthcoming Organisation of the Petroleum Exporting Countries (OPEC) meeting will see the world’s major oil producers come together on 22nd June, in Vienna, to discuss oil production quotas. There seem to be two opposing factions: Saudi Arabia and Russia is supporting a production increase whereas Iran, Iraq and Venezuela want the output (1.8 million barrels a day) to remain as is.
In addition, there has been a sell-off of commodities and stocks in the last few days which has brought prices down, in the wake of renewed intentions by President Trump to continue the tariff war. Low oil prices do need to a further increase in oil production – quite the contrary.
Russia is looking to grow its export income by a short-term increase in production, in the hope that the price holds. Saudi Arabia may have the same objective. They may also want to appease Trump who has been friendlier to them as opposed to the Obama administration.
If the output is intended to moderate the price hike and stop demand destruction, this demand destruction may have already happened in the last week. I don’t see why OPEC would open up the valves and push the price further down to $50s.
The meeting on 22nd June is a going to be tense. I suspect a compromise will be made to keep everyone happy, including Russia who seems willing to collaborate with OPEC even as a non-member.
OPEC is caught between a rock and a hard place at the moment; if they decide to increase output and the price drops, it will lead to a loss in income for OPEC and discourage US shale producers to pump out more. If they keep current quotas, the opposite will happen. There is no perfect strategy."
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Professor of Commodity Economics and Finance, Director, MSc in Energy, Trade & Finance