Opec+, the group that brings together some of the main oil-exporting countries, has decided to raise collective production levels by 188,000 barrels per day starting in June.
BETWEEN ANNOUNCEMENTS AND REALITY
This is the third consecutive monthly increase, which, however, could remain unimplemented: the Strait of Hormuz – that is, the waterway connecting the Persian Gulf with the Gulf of Oman, ensuring access to the Indian Ocean – is still closed, and hydrocarbon producers in the region cannot do without it. Even if the strait were to reopen soon, it could still take weeks or even months before the situation returns to normal.
OPEC+’S REACTION TO THE EXIT OF THE EMIRATES
Opec+’s decision, therefore, should be interpreted more as a statement of intent than as a concrete move: it is a signal of continuity to the market after the exit of the United Arab Emirates from Opec, the organization of oil-exporting countries of which Opec+ is an informal extension. The “loss” of the Emirates is significant, as it is a major producer, and could undermine the group’s ability to influence crude prices through increasing or reducing supply relative to demand.
WHAT SAUDI ARABIA WILL DO
Opec+ is effectively led by Saudi Arabia and Russia; it has twenty-one members – including Iran, which is blocking the Strait of Hormuz – but the truly relevant ones are seven: Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Oman, and Kazakhstan.
Saudi Arabia, the largest producer among Opec+ members and the promoter of the maximum production quota mechanism, will raise its output to 10.2 million barrels per day in June, compared to 7.7 million in March.
MEANWHILE, IRAN…
Like other Persian Gulf countries, Iran is unable to export its crude due to the U.S. naval blockade of the Strait of Hormuz: the Americans are preventing Iranian tankers from reaching international markets to deprive the regime of a crucial source of revenue. Since storage is filling up, Tehran has begun to reduce oil production: this is a practically forced but risky decision because oil wells can be damaged if they are stopped and pressure is not carefully managed.
However, according to Bloomberg, Iran is prepared to manage such a situation because decades of economic sanctions have produced a restructuring of the national production system into a sort of “resistance economy.” For example, petroleum engineers have learned to deactivate wells without causing permanent damage and to reactivate them quickly.
In short, Iran is probably able to resist more than the Americans believe – President Donald Trump declared that Iranian oil infrastructure would “explode” in a few days – but it cannot go on indefinitely. Within roughly a month, the country will no longer have available space to store unsold oil: according to Kpler’s calculations, Iran has eighteen tankers available in the Persian and Oman Gulfs with a total capacity of 35 million barrels.
OIL PRICES
This morning oil prices fell slightly but remain above $100: Brent – the main international contract, based on the North Sea – is at $108.1 per barrel, while West Texas Intermediate – the U.S. benchmark – is at $101.5.
