June’s OPEC meeting is anticipated with fear by analysts, with the potential of a crash in oil prices if Saudi Arabia and Russia decide to ramp up production.

Officials confirmed that Moscow and Riyadh are discussing a 1 million bpd production increase. This, however, stands in contrast to remarks by Khalid Al Falih, Saudi Minister of Energy, and his Russian counterpart Alexander Novak, that a discussion is ongoing though the parameters have not yet been discussed.

While oil prices crashed, the very vague statements by the two proponents of the current OPEC/non-OPEC production deal should be seen as a more direct way of stating “we will not be doing anything, except if the market needs it”. What analysts tend to forget is that the statement came after an accusation tweeted by U.S. president Donald Trump, who blamed OPEC for keeping prices ‘’artificially very high’’.

However, the market is still not balanced. OPEC’s main producers Saudi Arabia, the UAE and Kuwait, and non-OPEC leader Russia, can’t really reap the rewards from a production increase at present.

Putting a renewed threat in the market that new supplies are coming online soon could trigger a downward spiral which neither Saudi Arabia or Russia would be able to control. The negative results of the last output boost still haunt Russian and Saudi oil strategists. The oil leaders, however, seemed to have felt the need for media action after Trump took to twitter, and Asian importers India and China started to complain about high oil prices. Related: OPEC Has Regained Its Grip On Oil Markets

Looking at crude oil futures, a picture could be painted of a market being ruled by bears. Prices are showing a downward tendency, which is being reassuring to consumer countries at present. These cheers, however, could be very quickly be a thing of the past. The bulls are not yet back in the stables and increased geopolitical risk and an outright political crisis in Italy, Iran and Saudi Arabia, they could soon be ready to make a run.

Looking at the real fundamentals in the market, there’s little downside risk for oil prices. The current correction is possibly only a profit taking exercise, and most fundamentals are pointing to another price hike in the short-term.

The well-documented Iran crisis is heating up and could lead to an internal struggle. The mainstream media has so far published only a fraction of the reports about the deteriorating situation within the country. Lower oil and petroleum exports are to be expected after the summer as the first effects of U.S. sanctions become visible. At present, Iranian exports to Europe are already reported to be down, while Vitol, the world’s largest oil trader warned that there’s no getting around sanctions.

At the same time, OPEC’s most unfortunate member, Venezuela, has seen its production crash over the last couple of months. The ongoing internal unrest and economic crisis in Venezuela has already caused a production drop of 600,000 bpd compared to 2016’s output, and new U.S. sanctions will put the final nail in the coffin.

The combination of lower Iranian and Venezuelan export volumes will hit the market very hard, as an expected 1-1.5 million bpd are at risk in the coming months. A Saudi-Russian production increase will only partly mitigate this dramatic change. Why should Riyadh and Moscow supply more crude oil while global storage volumes are just below the targeted average, and the two countries are currently reaping the financial rewards of their painful struggle for stability? There is no rational reason. At the same time, as some analysts have stated that even if the two would decide to increase their production, it will take around 4-6 months to hit the market. Turning on the taps is not the same as filling up the swimming pool at home. It takes time.

U.S. shale drillers aren’t likely to be saving the day either. Already, news is emerging that increased production in the U.S. shale patch is being constrained by the lack of pipeline capacity to bring volumes to the market. One thing that many fail to understand, is that U.S. shale is NOT a swing producer, and never will be.

Not only are fundamentals showing a possible price hike very soon, political issues in some prominent OPEC countries seem to be overlooked again. The unexpected outcome of the elections in Iraq, in which former anti-Western Shi’ite extremist Muqtadah Al Sadr has become the Kingmaker doesn’t bode well for the near future. Increased instability or even a return to renewed sectarian fighting is to be expected. Especially since the former pro-Iranian Al Sadr now has chosen an anti-Iranian position, sometimes even concurring with Saudi Arabia’s views on the future of the country. Related: Oil Price Correction Sparks Sell Off In Russian Markets

OPEC’s main producer and long-time leader, Saudi Arabia is still struggling with domestic threats. After general optimism about the changes put in place by Crown Prince Mohammed bin Salman, the country is struggling not only to implement the mega projects presented but also with the effects of the ongoing societal changes. The position of King Salman and MBS is strong, but still under severe internal pressure or even outright threats. The last weeks, MBS has not been very visible in the Kingdom, and rumors emerged stating that he could be injured or even dead. These views should however be taken with a grain of salt, as destabilizing Riyadh is to the advantage of Doha and Tehran.

Still, MBS has maintained a low profile lately. Ongoing conflicts within Royal Family or with some of the vested economic power players might not have been solved completely. The coming weeks the pressure is on the Saudi King and his son, not only because of the OPEC meeting, but also to crush possible religious conservative opposition that could emerge around the 14 of June, when Saudi women will be hitting the streets for the first time driving their own cars. A conservative extremist reaction is to be expected, and while the outcome isn’t clear, an instable Saudi Arabia could have a significant impact on oil prices.

If instability and production threats weren’t enough, Italy’s politicians presented another Jack in the Box. The political and constitutional crisis that suddenly emerged in this major European country could be threatening not only the future of the Italian economy, but spark fears of another Euro crisis.

The latter situation, if spreading to other EU members, could pose a bearish threat to oil markets. Still, on a global level the Italian bear could end up to be looking more like Winney the Poo, licking honey from Brussels honey pots, but not really having an intention to hurt at all.

By Cyril Widdershoven for Oilprice.com

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