• 4 minutes Energy Armageddon
  • 6 minutes How Far Have We Really Gotten With Alternative Energy
  • 10 minutes Russia Says Europe Will Struggle To Replace Its Oil Products
  • 8 mins GREEN NEW DEAL = BLIZZARD OF LIES
  • 1 day Reality catching up with EV forecasts
  • 3 days "Natural Gas Price Fundamental Daily Forecast – Grinding Toward Summer Highs Despite Huge Short Interest" by James Hyerczyk & REUTERS on NatGas
  • 13 days US Oil Independence is a myth and will always be a myth
  • 3 days A Somewhat Realistic View of the Near Future for Electric Vehicles Worldwide
  • 8 days The Federal Reserve and Money...Aspects which are not widely known
  • 8 hours "Oil prices likely not responsible for inflation and other energy insights by hedge fund manager Josh Young" - Kitco News interview by David Lin
  • 13 days Oil Stocks, Market Direction, Bitcoin, Minerals, Gold, Silver - Technical Trading <--- Chris Vermeulen & Gareth Soloway weigh in
  • 16 days "Biden Is Running U.S. Energy Security Into The Ground" by Irina Slav
  • 16 days *****5 STARS - "The Markets are Rigged" by The Corbett Report
  • 17 days Natural gas price to spike when USA is out of the market
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

Does OPEC Need An Exit Strategy?

One of the crucial details that OPEC omitted when it rolled over its production cuts for another year was how the group plans on winding down the agreement. When pressed by reporters, Saudi oil minister Khalid al-Falih said that it was “premature” to talk about an exit strategy.

Taking “extraordinary measures” to rescue the oil market without any idea on how to exit the intervention is not unlike what central banks have done over the past decade to juice the global economy. Intervening is easy, backing out is the tricky part.

Al-Falih emphasized that any exit would be “gradual,” and he went to great lengths to point out the strong relationship between Saudi Arabia and Russia, and not addressing how to end the deal is critical to that. “For now, the OPEC-Russia bromance continues.” Jamie Webster, an OPEC watcher at the Boston Consulting Group, told Bloomberg.

However, if it took some arm twisting to keep Russia on board for an extension this time around, it will be exceedingly difficult to extend again in a year, when the oil market is much tighter. As of now, OPEC and Russia don’t see global inventories falling back into the five-year average until the second half of 2018—seasonally lower demand during winter months suggests that the destocking process will take a breather in the first quarter.

Included in the November 30 announcement was the fact that all parties would revisit the agreement at the next OPEC meeting in June. That seems to be a formality since the meetings are always a time and place at which OPEC assesses the health of the oil market, but if the market tightens too much and prices rise significantly, Russia could push to end the agreement early. Related: Maduro: Venezuela Could Stop Crude Oil Sales To U.S.

ADVERTISEMENT

The flip side is that higher prices could spark another wave of shale drilling, which could keep a lid on prices and extend the “rebalancing” period. We’ll just have to wait and see, and the oil market will be left in the dark on the exit strategy until June at least, unless something extraordinary happens before then.

Goldman Sachs took a unique perspective, arguing that OPEC made it clear that it would act to stifle volatility, and that the oil markets are underappreciating that fact. According to this view, the exit strategy is somewhat of a misplaced question.

Al-Falih’s comments about how the group will remain “agile and responsive” to market conditions, combined with the fact that the overarching objective of the production cuts is to bring global inventories back down to the five-year average, indicates that OPEC will “remain data dependent, which reduces the risk of both unexpected supply surprises and excess stock draws,” Goldman analysts wrote in a November 30 research note.

“This leads us to reiterate our view that long-dated implied volatility remains too rich in the face of growing certainty on breakevens and sources of future supply,” Goldman said. “Although an exact exit strategy was not formalized, today’s announcement will further defuse long-term supply uncertainty in our view, with the latest earnings from U.S. E&Ps and oil majors also con?rming persistent declines in breakevens.”

ADVERTISEMENT

In other words: Nervy oil traders wondering about an exit strategy should just chill out—OPEC has everything under control. Related: Shell Aims To Half Emissions By 2050

If the cuts tighten the market too much, OPEC has spare capacity sitting on the sidelines that it can call into action, while the extension of the cuts should take care of any shale comeback. There is “time to settle” the coming growth in shale output “until the cuts end,” while the OPEC extension is still not too aggressive, Goldman argued, “reinforcing its volatility dampening effect.”

Meanwhile, the cap on Nigeria and Libya at 2017 production levels takes away any supply surprise from them.

In short, the oil market is in good hands; and the volatile trading is unjustified.

Goldman even said that it assumes that similar production cut agreements (if not this one) will “continue in the coming years even after production starts to rise, consistent with OPEC’s modus operandi of the 1990s.”

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage


ADVERTISEMENT


ADVERTISEMENT



Leave a comment

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News