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Why OPEC’s Decision To Delay Makes Sense

OPEC decided to maintain deeper cuts for the next few months, but it also decided to delay until June a decision on whether or not to extend the supply curbs.

When OPEC and its non-OPEC partners announced the new round of production cuts last December in Vienna, it also said that it would revisit the agreement in April. The meeting was intended to assess the progress of the cuts, take stock of the oil market, and decide whether or not to continue the agreement.

Now, OPEC feels it needs to kick the can down the road. Saudi oil minister Khalid al-Falih said that because the oil market will probably remain oversupplied through the first half of the year, it would be premature to try to make a decision in April.

Some analysts aren’t quite as pessimistic as the Saudi oil minister, but delaying a decision makes sense, and not just because Riyadh thinks the market is dealing with too much oil. The biggest reason to delay any action is that the waivers on Iran sanctions are set to expire in May and the Trump administration has to decide whether it wants to extend them, extend some of them, or go for broke by letting them expire.

The Trump administration has sent contradicting signals on this issue in the last few weeks. The Trump team’s lead envoy on Iran sanctions, Brian Hook, said in Houston earlier this month that the degree to which the U.S. government tightens the screws may hinge on Venezuela. Hook’s comments, made at the IHS CERAWeek Conference, sounded somewhat conciliatory, and he admitted that America’s ambitions will be calibrated with an eye on oil prices. Trump “has made it very clear that we need to have a campaign of maximum economic pressure ... but he also doesn't want to shock oil markets, he wants to ensure a well-supplied and stable oil market,” Hook said. “When you have a better-supplied oil market it enables us to accelerate our path to zero, but we also know that there are a lot of variables that go into a well-supplied and stable oil market.” Related: “Perfect Storm” Drives Oil Prices Higher

However, several unnamed officials recently told Bloomberg that the oil market could survive just fine without any Iranian oil exports this year. The comments suggest that the Trump administration is at least considering the harshest strategy of “going to zero.”

More likely would be a strategy of trying to get Iran’s exports below 1 million barrels per day (mb/d), down from around 1.2 mb/d, as other sources told Reuters recently.

Precisely because the signals are confusing and somewhat contradictory, it makes sense for OPEC to delay any decision on the supply cuts.

At the same time, the crisis in Venezuela does not appear to be close to a conclusion. Venezuela’s oil production fell by 140,000 bpd in February and could fall by even more this month. The country was crippled by a widespread blackout for a period of time, which decimated oil exports. Nobody knows how this is going to play out and with the situation so fast-moving, events on the ground can change quickly. It would be foolish for Saudi Arabia and its partners to rush to a decision on production levels.

Meanwhile, the U.S. Congress is working on the NOPEC legislation, which could lead to antitrust scrutiny on OPEC should it become law, at least in theory. Many analysts believe that the odds of passage could increase if oil prices rise higher, which would make OPEC an easy scapegoat. However, predicting moves in Washington is a dangerous game to play. Related: Oil Slips As Alberta Relaxes Oil Production Cuts

Against this backdrop of uncertainty, it’s better to wait until the June OPEC meeting before the cartel takes major action.

To top it off, the OPEC+ coalition itself has some work to do. Saudi oil minister Khalid al-Falih said that he does not expect the group to leave the market “unguided in the second half” of the year, but it is widely thought that Russia is less keen to extend the cuts. “The Russian corporates hate shutting in production. They benefit from volume. The state takes the upside of higher prices, so for them, they don’t like the agreement,” Helima Croft of RBC Capital Markets told CNBC. “But for Saudi Arabia and for the rest of the OPEC producers, current prices still remain below their fiscal breakevens, so they would like to see prices a bit higher from here.” Russia has yet to fully comply with its promised cuts, although Russia’s energy minister said it would reach those levels soon.

For now, the OPEC+ cuts seem to be doing the trick, so it’s logical to let them run their course for a while longer. “Supported by OPEC’s evident willingness to “do whatever it takes” to maintain the balance on the oil market, Brent and WTI are today trading close to their multi-month highs at over $67 and $58 per barrel respectively,” Commerzbank said in a note.

By Nick Cunningham of Oilprice.com

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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

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