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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Most Important Part Of The OPEC Deal

OPEC

The OPEC meeting in Vienna last month was, despite all the hype, always going to be a dull affair. The extension of the oil supply cuts had been all but decided before the members met, and only the length of the extension was subject to speculation. But in six months’ time, these members will meet again, and this time around there will undoubtedly be drama.

Saudi Arabia’s Energy Minister Khalid al-Falih said in Vienna that discussing an exit strategy from the cut agreement was premature, adding that the exit would be gradual. Now, it’s beginning to look like his remark may have been a bit premature: other OPEC officials are already talking about it.

In recent days, two OPEC oil ministers—UAE’s Suhail al Mazrouei and Kuwait’s Issam al-Marzouq—have commented on an exit strategy. Both have been guarded in their remarks, with Al Mazrouei saying simply that it was “unfair” to speculate about it and al-Marzouq noting that Russia wanted to exit the agreement as soon as possible. Yet, they have drawn attention to the issue of the exit, and that’s a big issue that could upend markets next year.

The FT has listed the exit strategy among the five factors to watch with regard to oil prices next year. Oilprice’s Nick Cunningham compared the issue of the exit to the problems central banks are facing now when they need to start tapering their quantitative easing programs launched in response to the 2008 financial crisis. “Intervening is easy,” Cunningham noted, “backing out is the tricky part.” Related: Huge WTI-Brent Spread Boosts U.S. Crude Exports

The uncertainty around the exit strategy is certainly making traders nervous and prices volatile. It’s easy to see the cause of this nervousness: “gradual” can mean so many things, after all, and for some participants in the agreement it may be better to continue with the cuts rather than to restore production, despite the risk to market share.

One thing is certain: when the exit strategy is announced, it will pressure prices. In the best-case scenario, the exit will be so gradual that the price decline will be very short-lived. In the worst-case scenario, the exit will be the fruit of tense discussions among nations with different agendas, and it could cause a more prolonged decline in international prices.

It’s because of this potentially devastating effect on prices and the notoriously news-sensitive nature of oil traders that OPEC is being hush-hush about its exit strategy. According to officials from the group, the issue is being discussed already. Yet it is being discussed in private to avoid scaring traders. As a result, what we could expect in the next six months is likely a lot more guarded remarks. It’s anyone’s guess what media and traders would read into these remarks. Related: 'Perfect Storm' Wreaks Havoc On Europe’s Energy Market

But not everyone sees the exit strategy as a dramatic issue for OPEC and its partners. Goldman Sachs, for one, is pretty cool about it. In a research note from November 30, the investment bank’s commodity analysts said that OPEC’s number-one priority is to relieve global markets of the supply overhang, and the cartel is acting in line with this priority. This, according to Goldman, means that OPEC will be extra-careful not to shock markets with a surprising production increase or, conversely, an equally surprising supply draw.

It’s certainly unnerving to be in the dark when it comes to commodity prices, especially oil. Goldman’s perspective may offer some peace of mind because it makes sense, really. OPEC and Russia would not risk what they’ve gained so far with the cuts, particularly as U.S. production continues to grow and challenge these gains. Yet, surprises are always on the table, so it will be an interesting six months.

By Irina Slav for Oilprice.com

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