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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 OPEC Deal May End In June

oil rig winter

A couple of weeks ago, comments from the UAE’s energy minister spurred the oil price rally higher. What the minister said — or rather, hinted — was that the oil production cut deal that OPEC agreed to at the end of 2016 with Russia could continue beyond its December 2018 deadline. The rise, however, may have been too high for OPEC and Russia’s liking. 

In a market that runs on rumor and comments, prices were bound to jump higher after Suhail Al-Mazrouei’s comments and a string of bullish forecasts on oil demand. They are now apparently too high, and OPEC might be considering ending the deal at the June meeting of the so-called Vienna Club that includes Russia and the other countries that agreed to cap their oil production. 

A growing number of commodity analysts are predicting that this is how events will unfold. Citi’s Ed Morse, for example, told Bloomberg recently that OPEC and Russia have reason to “want to talk the price down” because they fear how U.S. shale will respond to Brent above $70. What’s more, Morse noted, U.S. shale is not the only threat for OPEC’s peace of mind: deepwater oil and Canadian oil sands can be just as dangerous at the right price level. 

Then there’s Russia, of course, which, as Morse says, is particularly concerned about high oil prices lifting the ruble — and Russia doesn’t want an expensive ruble, as it would diminish the competitiveness of its exports. As a result, the Russian central bank is currently on a dollar-buying spree to help keep the local currency cheap.  Related: Will The Dollar Survive The Petro-Yuan?

Morse is part of a growing company that also includes the commodity analysts of Societe Generale and JPMorgan. Deutsche Bank analyst Michael Hsueh said earlier this week that Brent hitting $70 would accelerate the process of devising an exit strategy. 

Commerzbank’s Head of Commodity Research, Eugen Weinberg, is cautious in comparison. He told Oilprice that “at least Saudi Arabia would stay its course. Since they re-emerged as a clear group leader they are likely to support the others to fulfill the deal this year. As to Russia the situation is unclear but at the moment they are likely to stick to OPEC's strategy.” 

Bank of America’s analyst team seems to share that view. The bank recently forecast that the cartel and its partners are more likely to start phasing out the cuts in the beginning of 2019 and no earlier. What’s more, the phasing out will take the form of small monthly production increases, the lender said, much like the Federal Reserve did with its QE program in the U.S. 

Meanwhile, two banks have raised their price targets for oil for this year. BofA said it had revised its supply and demand forecast for the year and now expected a deficit of 430,000 bpd versus an earlier one of 100,000 bpd. As a result, BofA now expects Brent crude to average $64 a barrel and WTI to hover around $60 a barrel. That’s up from $56 and $52 a barrel, respectively. 

Morgan Stanley equity analyst Martijn Rats was even more upbeat, expecting Brent to jump as high as $75 occasionally during the year. He also raised his price target for Brent in the third quarter of this year to $75 a barrel from $63.  Related: Iraq Is Troubling The Oil Majors

Goldman Sachs is playing it safe this time: It hasn’t raised its price targets yet, but has warned that it might happen soon. Though the investment bank’s analysts share the overwhelming opinion that higher prices will inevitably drive an increase in U.S. oil production, they also believe the price response will be delayed, allowing for a further price increase before the decline. 

As usual, there is no unanimity, but several factors seem to point to an early exit. Russia wants it, and has the upper hand over Middle Eastern producers in the deal. The global glut is by most accounts gone, so the goal of the deal has been accomplished. And finally, Aramco’s IPO is scheduled for the second half of the year. It would probably look better to prospective buyers of the 5 percent listing if the company doesn’t shoulder too heavy a burden of cuts, as it has been doing so far to compensate for the laggards. 

It looks like the banks might have to prepare for another price target revision around June. 

By Irina Slav for Oilprice.com

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  • Russiawithlove on January 18 2018 said:
    Yes they want to crash the price before the Saudi IPO makes complete sense. How about crush it after the IPO. Anyways I guess you need something to write about
  • Don Westlund on January 18 2018 said:
    “Meanwhile, two banks have raised their price targets for oil for this year. BofA said it had revised its supply and demand forecast for the year and now expected a deficit of 430,000 bpd versus an earlier one of 100,000 bpd. As a result, BofA now expects Brent crude to average $64 a barrel and WTI to hover around $60 a barrel. That’s up from $56 and $52 a barrel, respectively.”

    If the deficit remains at 430,000 bpd for the year, this would equal a global inventory drop of 157,000,000 barrels for the year…. prices will be much higher than $64 a barrel.
  • GaryB on January 18 2018 said:
    I'm sorry, but comments by the UAE energy minister have not spurred higher oil prices. Declining oil inventories are the driver. OECD oil inventories have steadily declined since Feb-2016, with the rate about 1 mb/d during 2017.

    Nor are prices too high for OPEC and Russia’s liking. If OPEC and Russia have learned anything during the past two years, they probably know that increasing their oil production will fail to put additional money in their pocket. Oil prices will quickly rise to $ 100 if OPEC and Russia just sit tight, no matter how much additional supply North American tight oil can generate during 2018.

    During 2017, the rise in global oil demand (1.57 mb/d) outpaced the rise in non-OPEC oil supply (.77 mb/d) by a wide margin. During 2018, that trend is supposed to continue. The rise in 2018 global oil demand (another 1.53 mb/d) is currently expected to outpace the rise in non-OPEC oil supply (1.15 mb/d) by a wide margin. In response, global oil inventories should decline even faster and oil prices should continue rising.

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