ING Suggests Doomed OPEC Cutbacks Render Pointless Iran's Aim of Keeping Oil at $60/bbl

Monday March 12, 2018

Unlike Middle Eastern nations such as Saudi Arabia, which wants high crude prices to boost the value of its IPO of state-run Aramco, Iran expressed its concern over steadily-rising U.S. production by stating it wants to work with the Organization of the Petroleum Exporting Countries (OPEC) to keep prices at $60 and curtail the output.

However, if predictions from Warren Patterson, a commodities strategist at ING Groep NV, prove accurate, Iran has nothing to worry about: because U.S. activity is angering OPEC allies to the degree they will soon abandon the cartel's production cutback deal, pump all out, and drive prices back down again.

Bijan Zanganeh, oil minister for Iran, said over the weekend that OPEC could agree in June to begin easing current oil production curbs in 2019; however, he added that working with the cartel to thwart the Americans is vital because "If the price jumps [to] around $70 ... it will motivate more production in shale oil in the United States."

For the record, the Islamic republic is allowed to pump up to 3.8 million barrels per day (bpd) under the cutback deal, and Zanganeh said his country could produce about 100,000 bpd more.

ING's Patterson agrees that keeping a lid on price hikes is necessary; in an interview in Singapore he said,  "We need to see prices in the short-term trade below $60 to reduce that incentive for U.S. producers."

But the analyst seems to think this might be a fait accompli, because the OPEC deal is giving "market share to the U.S." via a surge in exports to the coveted Asian market, the traditional bastion of Middle East producers - and that this will encourage some nations to retaliate by boosting supply.

Energy Information Administration data shows that exports have averaged about 1.5 million barrels over the past six months, almost double the level in the previous six months, with Asia being the biggest buyer.

Patterson predicted, "The longer the [OPEC] deal goes on, it's going to start falling apart."

Wood Mackenzie Ltd. last week forecast that U.S. crude shipments overseas will soar to almost 4 million bpd by the mid-2020s, rivaling shipments from Iraq and Canada; and as far as Patterson is concerned, the Middle East won't give up Asia easily.

He concluded, "We think compliance is likely to slip; the deal will still officially be in place, but once we get into 2019 there's no chance that we will see some sort of deal."

Last week Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch, predicted that OPEC's much ballyhooed prospective long-term union with Russia to control the crude market via cutbacks was also doomed to fail, mainly because "if the Russians extend the deal into 2020, they lose more market share to the U.S., and I don't think they're wiling to do that."