OPEC has delivered a compromise that shows the commitment to unity that Saudi Arabia - and Russia - hoped for. Both countries worked hard to address the various issues facing the group and its non-OPEC partners.
Faced with an uncertain supply outlook for two key OPEC members - Iran and Venezuela - and pressure from the US government to address high prices, OPEC delivered an agreement that keeps Iran in the fold, despite its resistance to higher production.
Today's meeting was arranged to give OPEC the opportunity to review production restraint and make sure it was still needed. This was an addition to the November 2017 accord in response to Russian pressure to have an escape clause if production restraint were to be imposed for all of 2018.
OPEC avoided a decision to fully lift production restraint by instead agreeing to lower its adherence to the current accord from the current 152% to 100%, a clever way to increase output without officially agreeing on an end to output curbs. This should bring a total of 0.6 million barrels per day (b/d) back into the market during H2 2018.
Tomorrow's meeting with non-OPEC producers will provide further clarity, as they gather to consider their side of the deal with an initial understanding that the leader of the non-OPEC partners, Russia, may increase its production by potentially as much as 0.3 million b/d by end-2018. Added to OPEC's increase in output of 0.6 million b/d that would leave Q4 2018 with a typical seasonal build in inventories.
This week, as ministers from the OPEC nations meet in Vienna, they must make a decision in the face of challenging and uncertain circumstances.
The producers' group must contend with differing production expectations for Iran and Venezuela, and consider external pressure for action from the US. For Iran, the exact impact of the newly restored US secondary sanctions remains unknown. Venezuela's production outlook remains uncertain, and recent outages in Libya may also weigh on decision-makers' minds.
Meanwhile, US President Donald Trump is keen to see production raised by at least 1 million barrels per day (b/d) to help address perceived crude losses in the market - in effect lowering oil prices to avoid high prices damaging economic growth.
How does the group prepare for this rapidly evolving situation?
This must be taken into account even though three OPEC members - Iran, Iraq and Venezuela - have signalled they are against an increase in output for H2 2018. These dynamics are teeing up an intense June 22-23 session to agree on the need for more output in the market.
Focusing on market fundamentals, we look at the impact of three possible options for OPEC and co-operating non-OPEC producers.
On the basis of our fundamentals forecast, which sees a 380,000 b/d decline in supply from Venezuela, January to December 2018, and Iran's output slipping to 3.4 million b/d by the end of this year, OPEC could maintain its goal of stable oil prices and continue the current production cut agreement. In our base case outlook, the losses from Venezuela and Iran are somewhat offset by continued growth in the US. This view leads to a small implied stock draw in Q3 2018, followed by an inventory build in Q4 2018 which is expected to weaken prices heading into 2019 when we see an oversupply for the year.
If consensus at the meetings is for a larger decline in Venezuela or Iran, or both, compared with our base case, then OPEC and Russia along with other non-OPEC partners could decide on a production increase in H2 2018.
This analysis assumes OPEC agrees to increase its output by 0.5 million b/d, and Russia by 0.1 million b/d in H2 2018.
OPEC could increase output by a more dramatic 1 million b/d, adding a further 0.3 million b/d from Russia to bring the total gain closer to 1.5 million b/d. Saudi Arabia could do this with Russia to weaken oil prices significantly - leading to a reduction in gasoline prices in the US, and providing support to President Trump. Such a decision, if implemented, would have a large impact on the supply-and-demand fundamentals by creating implied stock builds averaging 0.9 million b/d in H2 2018, and 1.8 million b/d in 2019.
Balancing the different factors, if OPEC and Russia were to agree on a production increase, we think it would likely be a moderate one, which would avoid a sharp downward price adjustment, yet provide a response to US pressure for more supply. This is akin to Option 2, which is more likely to gain wider OPEC ministerial support than the larger increase mooted in Option 3.
That said, much depends on OPEC and non-OPEC expectations. The outcome of the meeting remains highly uncertain.