Below is an institutional research note written by Hedgeye Potomac Senior Energy Policy analyst Joe McMonigle. If you're an institutional investor email sales@hedgeye.com to read more Energy Policy research.
OPEC members meet on Thursday, and we expect them to ratify a longer production cut deal extension for 9-months as opposed to just rolling over the current option to extend for another 6 months. Not shock-and-awe but not normal either.
Market sentiment has turned against OPEC in recent weeks, and a 6-month extension would have resulted in almost no immediate impact on prices. Therefore, OPEC believes a 9-month extension into 2018 will provide it with a much-needed sentiment surplus and so far the market likes the move.
As we approach the meeting date, there have been some concerns about two possible surprises at the meeting – Iraq and potential deeper cuts.
We have always believed that Iraq will go along for the ride...
However, Iraq has sent mixed messages about being able to comply for a 9-month extension. This prompted an urgent trip by Saudi Arabia’s oil minister to Baghdad on Tuesday and resulted in a joint announcement with the Iraqi minister that Iraq was on board.
The other concern is about some speculation in the market about OPEC going for a deeper production cut. Kuwait’s oil minister added to the speculation Tuesday by saying it was a possible option for OPEC at the meeting.
We think the probability of a deeper OPEC production cut is very low. It is the wrong time of year for the Saudis to do a deeper cut with upcoming summer demand season in the Kingdom. It is a similar situation faced by almost all other OPEC members. It's a lot for OPEC to get members on board for the 9-month extension; deeper cuts are almost impossible to get consensus now.
Non-OPEC participation in the extension could present some potential snags to increasing positive sentiment. Since Russia agreed to the 9-month extension last week in a joint statement with the Saudi oil minister, we expect OPEC to make a positive forward-looking statement Thursday regarding the Non-OPEC component.
However, Kazakhstan and Oman have indicated some concern about the 9-month extension. OPEC is already looking for replacement producers to mitigate any cracks in Non-OPEC pledges, specifically Egypt or Turkmenistan - small producers that would most likely only pledge small amounts.
Deeper OPEC Cuts?
There is a scenario in which the Non-OPEC component could provide some room for pledges that equate to a "deeper" cut. This would be the case if OPEC is able hold on to all current pledges and add additional pledges by new producers like Egypt or Turkmenistan. However, even if they can pull this off, the math will be insignificant.
Regardless, we believe the market will continue to view non-OPEC compliance, especially Russia, with great skepticism.
