NOTE: There will be an OPEC meeting preview at the Hedgeye Energy Policy Conference on October 11 in New York with former OPEC President and Algerian Oil Minister Chakib Khelil, among other key speakers Contact sales@hedgeye.com to RSVP and get more information.
OPEC’s Joint Monitoring Committee meets on Friday in Vienna to assess the latest compliance of participants in the OPEC/Non-OPEC production cut deal. The committee is chaired by the Kuwait Oil Minister and includes Ministers from Algeria, Oman, Russia and Venezuela.
Saudi Oil Minister Khalid al-Falih, who also currently serves as the President of OPEC, has attended past meetings but he is not expected to attend Friday. Al-Falih’s absence at this meeting means that we are unlikely to see any significant news or actions this week.
Since September 1, we have seen a steady flow of comments from ministers speculating or thinking out loud about what steps OPEC may take to balance the market at its next meeting on November 30. As a result, we’ve put together this OPEC Trial Balloon Tracker to help make sense of the various missives.
Base Case – We discuss our rationale in the various proposals below but our base case for action at the next OPEC meeting on November 30 is a 3-month deal extension and removing exemptions for Libya and Nigeria. No action at the November 30 meeting is not an option as it would be greeted by a negative market reaction. A 3-month extension would bring the deal to about the same time as OPEC’s first meeting of 2018 in late May or early June. Libya and Nigeria have increased production by significant levels and is a source of great frustration among other OPEC members. Instead of cuts, we see caps on current Libya and Nigeria production at about current levels. We think this is the base case (minimum action to be taken).
Extension of the Extension – The current extension of the production cut deal runs through March 2018. The first trial balloon in mid-August was about an early 3-month extension of the deal that would be agreed to at the September 21 committee meeting in Vienna. We dismissed this trial balloon quickly. The extension would have to be approved by all ministers but only five ministers attend the monitoring committee meetings. It also begs the question of what OPEC will do at its November 30 meeting if it extends the agreement now. For the record, we highly doubt the extension will happen on Friday and indeed most ministers have since batted down the idea.
Longer Not Deeper - In addition, we have recently seen trial balloons for a longer 6-month or 9-month extension at the November 30 meeting. First off, we believe there will definitely be an extension of the deal at the November meeting. You can’t have all this talk about an extension and raise expectations and then do nothing at the next meeting. The most likely scenario is a 3-month extension after March 2018 that would line up nicely from a timing standpoint with OPEC’s first meeting of 2018 - typically in late May or early June. A 6-month extension would expire in September but OPEC doesn’t meet until late November so that would seem to be be unlikely. A 9-month extension through the end of 2018 is possible but to us seems unlikely because OPEC doesn’t like to commit itself that far in advance.
Deeper Cuts – There’s been some jibber-jabber about “deeper” production cuts, most notably from Iraqi oil minister Jabbar al-Luabi. Minister Luabi told reporters at an energy conference in the UAE that OPEC was considering both deal extensions and a slight additional cut. “Some, like Ecuador and other countries, even Iraq, think there should be another cut of 1 percent,” Luabi said adding there was “no firm decision yet.” More cuts of even one percent would be helpful but it seems unlikely that OPEC could get all of its members and the non-OPEC participants to agree to an additional cut when many are already not meeting their cut quota.
Lifting Libya and Nigeria Exemptions – When the production cut agreement was made, OPEC allowed exemptions for Libya and Nigeria due to conflict-causing disruptions in both countries. But in the months since, both OPEC members have added significant production undermining the OPEC’s efforts to balance the market and drain the supply glut. In Libya’s case, production rose from about 500,000 b/d in October 2016 to about 900,000 b/d in August 2017 – an increase of 400,000 b/d. Libya’s production in July hit over 1 million b/d. Nigeria’s production rose from about 1.4 million b/d in October 2016 to more than 1.7 million b/d in August 2017 – an increase of 300,000 b/d. So combined both OPEC members are undermining the effectiveness of OPEC’s production cut deal by about 700,000 b/d. In July we told clients that we thought that time was running out on the Libya and Nigeria exemptions and that OPEC would focus over the next few months on getting both countries back into the agreement. Nigeria almost gave up its exemption at the May 25 meeting but Libya resisted. Many OPEC ministers are frustrated about the growing production from both countries and its impact on the prices. There are news reports that both Nigeria’s minister and Libya’s head of the state oil company will attend Friday’s meeting. Regardless, we believe the exemptions will be lifted at the November 30 meeting. But don’t look for cuts from either country. Instead we think they will agree to production caps at around current production levels. Even caps would be a welcome sign for the market.
Cutting or monitoring exports – Much of the recent success by OPEC in generating crude inventory draws in the US is the result of Saudi Arabia’s concerted effort to cut exports to the US. The Saudis telegraphed this strategy in May after getting frustrated by the market’s singular focus on the weekly EIA petroleum reports. So the Saudis adopted a strategy we like to call “working the refs” – they would cut exports to the US in order to cause big draws in EIA data on US crude stocks. The plan worked pretty well until Hurricane Harvey entered the picture. Now we are entering a period when demand slows and refineries go down for maintenance. The maintenance process has been somewhat delayed by the gasoline disruption caused by both Hurricanes Harvey and Irma, and refiners have been incentivized by high margins to continue running at peak capacity. The Saudis are hoping to push all members and other participants in the deal to focus on exports rather than production. It’s a very hard ask but at the very least Saudi Arabia is asking for the Joint Monitoring Committee to monitor exports in addition to production. The monitoring seems doable but it might undermine the compliance picture. Except for Saudi Arabia, limiting exports further would be very difficult and so we expect little cooperation from other producers in the deal. For example, Iraq has been exporting periodically above its production quota and only pulls back after pressure from the Saudis and others. Russia, which claims to be 100 percent compliant, has been flooding the market with refined products.
Delay Aramco IPO to 2019 – Bloomberg cited two Saudi sources that said Aramco was considering a delay of its planned 2H 2018 IPO to 2019. Aramco moved quickly to quash the story and said all was on track for 2018. It’s an important development if true. The Bloomberg article’s sources cited issues relating to picking an exchange and other mechanics of the IPO as the reasons for the delay. We are not buying it. The Aramco IPO is the signature issue of the new Crown Prince, and the Kingdom’s entire reform plans depend on the IPO. The Saudis would lose a lot of credibility if the IPO was delayed to 2019. A delayed IPO would signal Saudi lack of confidence in oil prices and would be a terrible message to send to the market. So the IPO is a good barometer of the Saudis view of healthy oil prices and is important to watch closely. For the record, we do not believe the IPO will be delayed and so 2018 is shaping up to be a pivotal year for the Kingdom and oil prices. As we have said in previous notes, the Aramco IPO is now driving Saudi oil policy.
