3 Likely Scenarios for the Upcoming OPEC Meeting

OPEC and OPEC+ will meet on June 4 to discuss oil production. Traders should be on watch to see whether OPEC decides to keep production steady or to implement further oil production cuts this year.

On April 2, OPEC+ surprised markets with the announcement that some countries (Saudi Arabia, Russia, UAE, Kuwait, Oman, Algeria, and Kazakhstan) would be cutting production on a voluntary basis in May and June. While Saudi Arabia and the UAE have cut production as promised, it is unclear whether Russia has cut production by the 500,000 bpd it publicly committed to.

Russian exports increased between March and April and have held steady in May, even though Alexander Novak claims that oil producers reduced production by 400,000 bpd and that Russian refineries have been closed for maintenance. Many market watchers are skeptical, given the high levels of exports and the pressure on Russia’s oil industry to continue to generate revenue for the government.

Every producer in OPEC+ wants to see higher oil prices. Saudi Arabia’s oil minister made clear that he thinks financial speculation—specifically short selling—is to blame for keeping oil prices down. Here are a few potential scenarios for this weekend’s OPEC meeting:

1. OPEC+ Makes No Changes to Current Policy

The group decides to continue with the voluntary cuts, giving Russia a chance to fully implement its commitments and see if higher summer demand for gasoline along with the fully implemented voluntary cuts pushes oil prices up. This could cause a slight drop in prices when the market opens if traders thought that OPEC+ was going to cut production.

2. OPEC+ Implements a Binding, Across-The-Board Production Cut

Countries that participated in the voluntary cut will maintain those levels of production, but all other producing nations will cut production by a small percentage. This could cause a small or temporary increase in prices when the market opens because cutting production during a period of seasonally high demand will mean higher prices, but many traders do not believe Russia will actually take barrels off the market until they are presented with clear and independent data on Russian production, so the rise will likely be tempered.

3. OPEC+ Decides to End Its Voluntary Production Cuts or Increase Production for All Producers

This would cause a drop in oil prices that would not further OPEC+’s goal of raising prices in the short term, but it might help OPEC+ producers, other than Russia, in the longer term. Russia would have to offer even more discounts for its oil, further cutting into its revenues, but lower global oil prices might act as a form of economic stimulus for some suffering economies.

In addition, a drop in global oil prices might push the U.S. government to make large purchases of oil to refill its SPR, which would raise global oil demand. This scenario is the most unlikely but cannot be discounted, especially given the Saudi oil minister’s penchant for making surprising moves at OPEC meetings.

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Disclosure: The author does not own any of the securities mentioned.