In the end, the OPEC Vienna meeting - which technically won't conclude until tomorrow - was anticlimatic, with the recommendation by Joint OPEC-Non-OPEC Ministerial Monitoring Committee in line with what was "trial ballooned", and leaked in advance:
The JMMC considered several scenarios presented by the JTC regarding the extension of the Declaration of Cooperation and decided to recommend that the production adjustments of the participating countries be extended for nine months commencing 1 July 2017. In this regard, the JMMC should continue monitoring conformity levels as well as market conditions and immediate prospects, and recommend further adjustment actions, if deemed necessary.
As such, OPEC and non-member producers are likely to "clinch" a deal on Wednesday extending output cuts by nine months in hopes of clearing the huge global stock overhang and prop up the price of crude.
(Click to enlarge)
In advance of the formal recommendation, there was a lot of noise as OPEC summits tend to create, and non-stop headlines from all the newswires. Distilling it down, Saudi ally Kuwait signaled on Wednesday OPEC could discuss deepening the cuts, in what would come as a positive surprise for market bulls, but hopes quickly faded after a key committee recommended keeping the curbs unchanged. Two OPEC sources told Reuters the ministerial committee comprising OPEC members Algeria, Kuwait, Venezuela, current OPEC president Saudi Arabia and non-OPEC producers Russia and Oman recommended keeping the cuts "at the same level."
Also according to Reuters, Saudi Energy Minister Khalid al-Falih gave the thumbs up when asked whether the committee had agreed on a nine-month extension. Most other OPEC ministers including Iraq's had already voiced support for extending cuts by none months.
One potential last minute wildcard is Iranian Oil Minister Bijan Zanganeh, who clashed with Saudi Arabia in many previous OPEC meetings, and has so far kept a low profile, saying extensions of six or nine months were possible. Zanganeh is due in Vienna later on Wednesday. As a reminder, Iran has already received an exemption slightly to raise output, which has been curtailed by years of Western sanctions. Iran's production has been stagnant in recent months, suggesting limited upside potential at least in the short term.
"Before the end of the year, prices may go above $55 a barrel," Algerian Energy Minister Noureddine Boutarfa told Reuters before the committee meeting, saying an extension by nine months should help clear the glut by the year-end. Of course, they may also plunge to $45 or lower, where they were as recently as two weeks ago following the violent liquidation of all of Pierre Andurand's long oil positions at steep losses.
Justifying the extension, Saudi Arabia and Russia said that prolonging output curbs by nine months rather than the initially planned six months would help speed up market rebalancing and prevent crude prices from sliding back below $50 per barrel, even though as we showed last week, the math behind a 9 month extension still does not work out.
Despite the seeming consensus, a gray cloud lingered throughout the Vienna meeting, with one main question unanswered: is OPEC still the "marginal price setter", or has OPEC lost control of the market and the "war with shale", as the following recent chart from Goldman recently suggested:
(Click to enlarge) Related: Iraq Could Make Or Break The OPEC Deal
Some quickly came to the cartel's defense: "OPEC has already achieved a lot. They stopped the oil market surplus from building even before they started cutting," said Gary Ross, head of global oil at PIRA Energy, a unit of S&P Global Platts.
Others, however, such as Erik Norland, senior economist at CME Group, unloaded on OPEC telling Bloomberg that "OPEC is in a terrible bind, they’ve lost control of the market, they’ve lost control of prices and are trying to figure out the least bad option."
His complaints should be familiar: the increase in non-OPEC production, particularly in U.S., has cost the group market share while deeper output cuts would worsen that situation. Norland sees OPEC’s extension of cuts priced in, even as U.S. production is likely to increase further, with significant downside risk: “It wouldn’t surprise me to see oil prices re-testing $40 or $35 a barrel.”
He also predicts that OPEC is more likely to cheat on cuts in 2H, despite strong compliance so far, citing a “natural tendency” of OPEC members, especially Iraq to fib. He also predicted that barring any major supply disruptions, he sees lower prices, though sees risk from “political disturbances” in producing nations.
“Calling it fundamentally bearish but geopolitically bullish is probably the right combination."
Finally, while the probability is small, there is a modest chance of surprise in tomorrow's final statement and according to Reuters, a substantial additional cut was unlikely, one OPEC delegate said, "unless Saudi Arabia initiates it with the biggest contribution and is supported by other Gulf members".
However, this is where our "math", and Norland's skeptical assessment come into play: "Production cuts cause higher prices which will incentivize more production for the U.S. shale oil and reduce the impact of the production cuts. So it's a bit cyclical," said Sushant Gupta, research director for consultancy Wood Mackenzie. Related: Saudi Finance Minister: “I Wouldn't Care If The Oil Price Is Zero"
Judging by the commentary from OPEC members, a surprise cut is unlikely. Algeria's Boutarfa said he believed stocks remained stubbornly large in the first half of 2017 because of high exports from the Middle East to the United States. "Thankfully, things are improving and we started seeing a draw in inventories in the United States," Boutarfa said, adding he believed that inventories should decline to their five-year average by the end of 2017.
There is one problem: it's not the U.S. where the marginal demand is currently set, but China, and as we reported last night, Chinese demand may be about to fall off a cliff if early indications that China's Strategic Petroleum Reserve is approaching capacity are confirmed. Should that be the case, some 1.2 million in oil demand is about to be eliminated overnight, forcing OPEC to quickly sit down again and hammer another, far deeper production cut. For now, keep an eye on the price of crude - should the recent jerk higher start to fade as the "news is sold", OPEC will be forced back to the drawing board on very short notice.
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