On the eve of the OPEC meeting, all signs point to a significant extension of the production cuts, although some key details remain unclear.
In the past, these gatherings in Vienna would typically be dominated by the Saudi oil minister, which for years was Ali al-Naimi, but since 2016 has been Khalid al-Falih. Last year, al-Falih helped engineer the OPEC/non-OPEC production cuts, convincing a group of non-OPEC countries including Russia to come on board and chip in some smaller reductions.
This time around, with Saudi Arabia desperate for higher oil prices ahead of its planned IPO of Saudi Aramco, it is in a weaker position to threaten and cajole laggards, since nobody believes it would follow through on flooding the market with supply. Instead, the one producer on the fence is Russia, which means that Moscow is the one “calling all the shots.”
It was quite a spectacle then on Wednesday in Vienna when all eyes were on Russian energy minister Alexander Novak instead of his Saudi counterpart.
Novak’s soothing words were exactly what the oil market wanted to hear, even if he omitted some crucial details that will have to wait until Thursday’s official meeting. “We have reached in general a mutual understanding,” Novak said in Vienna on Wednesday in a sort of warm-up meeting to the main event on Thursday. “I think we will have” a decision on an extension on Thursday, he added. Related: Oil Majors Are Leading The Recovery Race
Unlike in prior meetings, the range of possible outcomes are narrower. But there are still some key questions yet to be resolved.
1. How long with the extension last? The oil market is putting its money on a nine-month extension, which seems to be the base assumption for most analysts and investors. But there are still rumors that a six-month deal is under consideration. Citi published a research note on Tuesday warning that a nine-month agreement might not come to pass. "Significant Saudi corralling is likely to be needed in order to get a full nine-month extension done," said Ed Morse, head of commodities research at Citigroup, according to Bloomberg. Citi wrote in its note that it believes the nine-month extension won’t happen. "Our expectation is that something short of a nine-month extension is delivered, likely either a shorter extension or a deferral of the decision until" the first quarter of 2018.
2. Will an extension be conditional on market fundamentals? Russian officials previously pushed for a delay in a decision until early next year in order to assess the need for an extension. OPEC wants to lock in an extension right now. Another idea that Russia floated was a way to tweak the agreement depending on supply/demand fundamentals. As a result, the group could agree to an extension through the end of 2018, but with the caveat that the agreement could be revisited at the next official meeting in June.
3. Will there be an exit strategy? Bloomberg reported that one of Russia’s hang-ups was the lack of an exit strategy. Russian officials are concerned about overshooting and pushing up oil prices too far, which could cause its currency to appreciate more than the government wants. Also, unlike most OPEC members, Russia has private oil companies that want guidance on what to expect next year. Normally, OPEC does not signal its intentions to wind down coordinated action, but Russia wants some answers. "We will talk about it," Kuwaiti Oil Minister Issam Almarzooq said Tuesday.
At the pre-meeting on Wednesday, Almarzooq gave a bit of a pep talk to inspire action. He said that since September, the oil market “has continued to strengthen and is evidently on the path to rebalancing,” but that more work was needed.
“Let us not take this positive momentum as a reason to sit back and relax. Rather, let us be energized by the progress we have made, and continue to push onward until we reach our final goal,” Almarzooq said. “We are clearly on the right path, but there is still work to be done to bring the remaining inventories down to the latest five-year average, at which point we can say we have reached our objectives of a balanced and stable global oil market.”
After Russia’s apparent agreement to some sort of extension, the oil market can likely rest easy that they won’t be hit with an unexpected surprise. Still, there are some crucial details that everyone is waiting for, which will have important effects on the oil market in 2018.
By Nick Cunningham of Oilprice.com
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