To extend or not extend?
Officials from OPEC and a select few non-OPEC countries met over the weekend to review the state of the oil market, monitor their progress and discuss what to do next regarding their collective production cut deal.
The group offered a glimmer of hope for an extension of the cuts, with several countries stating their support for such a move. However, there was no formal position from the members. Instead they said that they will consider an extension when they meet in April and issue a recommendation ahead of the official ministerial summit on May 25.
The monitoring meeting this past weekend comes amid “increasing skepticism” in the oil market regarding the odds of a six-month extension, JBC Energy said in a recent report. U.S. oil production is rebounding strongly, with output back up to 9.1 million barrels per day, roughly 600,000 bpd higher than last summer. The rig count continues to rise as well, portending further production increases in the weeks and months ahead.
With prices retracing all of the gains made since the OPEC deal was announced back in November, the cartel faces the prospect of losing market share without any meaningful effect on prices. And with inventories still breaking new records in the U.S., the supply picture looks pretty dismal as well.
But if OPEC is starting to lose its resolve, Kuwait’s oil minister is doing his best to keep everyone on board. “More has to be done,” Kuwait’s oil minister Issam Al-Marzouq said in a speech at the meeting on March 26. “We need to see conformity across the board. We assured ourselves—and the world—that we would.” Related: Shell’s New Permian Play Profitable At $20 A Barrel
Al-Marzouq also implied that an extension would be necessary. “We are not surprised right now that the prices have fallen back…The prices have fallen down because the storage has not moved yet,” said on Bloomberg TV. “What we were hoping actually at the beginning that U.S. inventories would slowly come down. Not drastically, but slowly come down…What we are looking for is a five-year average of inventories. And that stands right now at 285 [million barrels] above that five-year average. So once the inventories start going down, hopefully we will go to the five-year average, of which we hope to reach around the end of the third quarter, hopefully.”
That last comment is key: if the inventories are to come back to more reasonable levels by the third quarter, as he expects, it would assume an extension of the deal. Al-Marzouq also warned his fellow OPEC members against cheating, saying that unless they work towards a “common objective…this date may be pushed further out.”
However, nothing concrete will be agreed to until they meet in April. At that meeting, a formal recommendation will be proposed on whether or not the cuts should be extended. Then, the agreement will be finalized at the May 25 meeting.
Oil analysts are looking for clues on whether or not OPEC will succeed in keeping everyone on the same page for an extension. Related: Why Are Shell And Toyota Backing Hydrogen Fuel Cell Vehicles?
Suresh Sivanandam, Wood Mackenzie’s senior manager for Asia Refining, thinks that it is highly likely that OPEC will roll over the production cuts for another six months, and the news from the latest OPEC monitoring meeting bolstered his prediction for two reasons. First, February data shows high levels of compliance with the cuts. Second, the OPEC committee said that it would consider the pros and cons of extending their deal for another six months ahead of the April meeting. Sivanandam told Bloomberg TV that the deliberations are a sign that they are serious about an extension.
However, not everyone is as optimistic. Goldman Sachs says that despite the recent fall in oil prices, and despite elevated inventories, “our assessment of oil fundamentals and the rationale behind the production cuts do not warrant, in our view, such an extension barring either a sharp deceleration of demand growth or a sharp rebound in Libya/Nigeria production.” Trying to drain inventories in order to boost prices could backfire on OPEC. "Oil prices above $60 per barrel would prove self-defeating in our view given the flattening of the oil cost curve and the unprecedented velocity of the shale supply response," Goldman said.
All of these dynamics are starting to unnerve oil speculators, who find themselves trying to unwind bets that got too far ahead of the fundamentals. After building up bullish bets at an unprecedented pace since the November deal was announced, investors found themselves left in a lurch. The net-long position by hedge funds and other money managers has plunged 37 percent since hitting a peak last month.
"These are troubling times for oil bulls," Stephen Brennock, an oil broker PVM, told Reuters. "Against a backdrop of rising U.S. crude output and underwhelming OPEC-led efforts to normalize bulging global oil inventories, positives are in short supply."
By Nick Cunningham of Oilprice.com
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