On June 5th, the Organization of the Petroleum Exporting Countries (OPEC) will convene its 167th meeting, ostensibly to discuss petroleum market dynamics and production policy. Given the sharp drop in oil prices following last November’s decision to leave production quotas unchanged, we can expect increased attention from investors on this upcoming meeting.
The latest reshuffling of leadership within the Kingdom of Saudi Arabia has led some to speculate that an oil output cut could occur, but that would be an about-face in policy from a country that tends to take a long-term view of the energy markets.
Our baseline expectation of no change in the aggregate production quota (individual country quotas have not been in effect for years) is probably consistent with market consensus. Saudi Arabia’s recent actions – including increasing production and exports from fourth-quarter 2014 as well as continuing to price its crude oil at competitive levels – do not suggest an imminent change in production policy. In addition, the sharp decline in global capital expenditures, an increase in global demand and the recovery in oil prices suggest the oil policy is working to rebalance supply and demand.
Lost in all the debate about OPEC’s relevance is one very important way OPEC influences prices: by restricting access to reserves. By restricting development of many of the lowest-cost, highest-quality basins, OPEC is de-facto supporting prices. What if the change in policy was to increase investment and offset lost revenues from lower prices through higher production and exports? That would be quite a shocker. Less dramatic, but with bearish implications, would be for OPEC to raise the aggregate quota to match existing output, which would state a very clear intention on market share.