Below is an excerpt from 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 ratifies 9-month deal extension: “We should be on target by the end of the year. It’s a good day for us and the market.”
OPEC Ministers met on Thursday and ratified an expected 9-month extension of its production cut agreement along with non-OPEC participants. All combined the pledged cuts equal 1.8 million barrels a day through Q1 2018.
The post-meeting press conference now takes on added significance because Saudi oil minister Khalid al-Falih is also serving as OPEC President and is the main speaker for the media presentation. We were watching closely to see if al-Falih would make some additional verbal intervention during the press conference to provide further support for prices.
Instead, we got the glass-is-half-full viewpoint. While oil prices were down nearly 3 percent during the press conference, al-Falih said he disregards daily price swings and said “the news of today is excellent.”
He highlighted the 9-month extension as the “optimum” path having acknowledged the ministers also considered 6-9-12 month extensions as well as deeper production cuts. Al-Falih explained that 6-months should technically bring OECD inventories into the 5-year average range by the end of the year, and the addition 3-months will ensure there will be no build in Q1 2018.
“We should be on target by the end of the year,” he said. “It’s a good day for us and the market.”
Al-Falih also listed additional reasons why OPEC is satisfied that its plan is working as intended, including:
- 7 weeks of draws in the US;
- Draws in floating storage;
- OECD inventories coming down;
- Demand is picking up (and highlighted India and China); and
- Historic cooperation with non-OPEC producers to extend cuts for 9-months.
As we have said in our previous notes in the run-up to the OPEC meeting, we believe OPEC had very little choice but to extend the agreement. No extension would result in a price collapse, and deeper cuts were out of the question due to high summer demand season in Saudi Arabia and other members.
Saudi Arabia and other Gulf producers will maintain high levels of compliance during the 9-month extension but compliance may be a challenge for others. Morever, the market will continue to view non-OPEC compliance, especially Russia, with great skepticism.
