Saudi Arabia and Iran are headed for a high-speed collision at Thursday's OPEC (Organization of Petroleum Exporting Countries) meeting in Vienna.
That much is clear.
What's not at all certain is that what effect the collision will have on oil prices. (OPEC pumps about 40% of the world's oil.)
This OPEC meeting it more fraught than most because there are two big items on the agenda.
First, OPEC is set to elect (or at least discuss electing) a new secretary-general, and both Saudi Arabia and Iran are pushing their own candidates. With the two countries locked in radically different positions on expanding/contracting OPEC production, I think the door is wide open to the selection of one of the compromise candidates backed by Ecuador or Iraq. (Of course, OPEC could deadlock. From 2004 to 2007, the organization was without a secretary-general because members could not agree on a candidate.)
Second, the Saudis have proposed that OPEC raise its official production quotas in order to keep global oil prices at $100 a barrel or less (for benchmark Brent crude.) The Iranians, who have seen their oil exports drop due to sanctions imposed by the United States and the European Union, want OPEC to lower production so that prices climb and oil importers have fewer alternatives to buying Iranian oil.
Saudi Arabia has raised its production above its quota to increase supply and lower prices during the current global economic slowdown. The Saudis say that it is in OPEC's self-interest to prevent a slowing of the global economy that would further reduce demand for oil. Iran, however, sees the increased production from Saudi Arabia as an effort to grab market share while Iran faces sanctions. OPEC pumped 31.6 million barrels a day on average in April. That was 1.6 million barrels a day above the official production quota set in December. Most of that "excess" production came from Saudi Arabia.
The pre-meeting guessing is that the Saudis will ask OPEC to raise its production quota to 30.7 million barrels a day beginning in July. Which would still leave OPEC production above the official quota.
So what's the point?
An increase in the official quota would give Saudi Arabia more "cover" for continuing to pump at current levels. Global oil consumption typically rises in the third quarter of the year that marks the end of the refinery maintenance season. It’s unlikely that Saudi Arabia will cut production during that period no matter what OPEC decides.
But an increase in the official quota that is still below what OPEC is producing now would also give the Saudis room to reduce production -- voluntarily -- in the last quarter of the year if the global economy is showing more strength. That would allow Saudi Arabia to give its stretched oil industry some breathing room and would bring in more revenue as oil prices rose with even a modest recovery in demand.
So what's the most likely effect of the OPEC meeting on oil prices?
Stability over the next quarter and a half at something like the $90 to $100 a barrel (for Brent crude) range preferred by Saudi Arabia. And then the possibility of rising oil prices in the fourth quarter of the year -- if it looks like the global economy is strong enough to pay the price. This price scenario would be good news for shares of oil drilling and service companies such as Schlumberger
) and SeaDrill
). Schlumberger is a member of my Jubak's Picks portfolio
I think this is the likely scenario even if Saudi Arabia and Iran can't reach any kind of agreement on Thursday.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Ensco, Schlumberger, and SeaDrill as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.