Editor's Note: Below is a research note on the oil industry and ongoing OPEC developments from Potomac Research Group Senior Energy analyst Joseph McMonigle.
Headline risks of an emergency OPEC meeting or consultations between OPEC and Non-OPEC producers have eclipsed market realities and resulted in recent volatility in oil prices.
Our message to investors? Ignore the noise and follow the data because that is exactly what Saudi Arabia is doing.
First, other OPEC members, namely Nigeria, Venezuela and Algeria, have been pushing for an emergency OPEC meeting to address low oil prices. The Gulf producers (Saudi, UAE, Kuwait) are opposed to such a meeting and would like to head off any special meetings before the regular OPEC meeting scheduled for June. We think the chance of an emergency meeting is slim. If there is a meeting, it will be just to talk. There is zero chance of a change in production.
Second, Russia has been pushing for a separate OPEC/non-OPEC meeting to discuss oil prices for some time. There is nothing new here. Saudi Arabia has been pretty consistent in their view: if there is a cut, everyone should participate. By everyone, they mean OPEC and non-OPEC. There may be a meeting – and we give it slightly better odds than an OPEC emergency meeting – but we think it is highly unlikely that an OPEC/Non-OPEC coordinated production cut results.
From Saudi Arabia’s viewpoint, their market share policy is winning. US production is slowing and forecast to drop by 700k to 1M bpd by year end. Except for Russia, other non-OPEC production is also affected. You could hear the cheers in Riyadh after ExxonMobil quarterly results were released: a 25% cap-ex cut, a hold on share buybacks and now facing a possible S&P credit rating downgrade. This is the type of data the Saudi’s are following.
Therefore, it's still too soon - all a production cut would do at this point is to throw a lifeline to US shale and other non-OPEC producers to increase production.
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To read the full version of the client note, including our look ahead forecast for Saudi policy for 2016 and the outlook for the June and December OPEC meetings, please click here.