OPEC’s upcoming November 30 Ministerial Meeting in Vienna promises to be highly consequential to oil markets. Global oil prices have finally crossed the $60/barrel threshold thanks to a perfect storm of geopolitical risks in Kurdistan/Iraq, Venezuela and Iran as well as consistent inventory draws caused partly by fundamentals (stronger demand/slowing US production), Saudi export cuts to the US and Hurricanes Nate and Harvey.
Saudi Crown Prince Mohammed bin Salman recently offered his personal endorsement for a deal extension in a statement saying “The Kingdom affirms its readiness to extend the production cut agreement, which proved its feasibility by rebalancing supply and demand.”
The Crown Prince’s comments highlight the deal extension’s importance to the Aramco IPO and raised market expectations for continued cuts at least through 1H 2018. Due to the Crown Prince’s remarks, we believe the market now has already priced in a deal extension.
We believe OPEC taking no action at the November 30 meeting is highly unlikely since it would be greeted by a negative market reaction. Thanks to OPEC jawboning, there are now raised expectations of a deal extension. As an added incentive to recalcitrant producers, Russia has announced it will increase production in 2018 if no deal extension is reached.
OPEC’s job at the November 30 meeting is to not screw up the momentum that has raised prices to the $60 level while at the same time not let prices get ahead of fundamentals and trigger greater US shale production.
We see an 80 percent chance of a deal extension. The only question is how long.
Press reports have detailed, and we have confirmed independently, that Saudi Arabia and Russia prefer to have a 9-month extension of the production cut deal that would translate into cuts for all of 2018. There has been so much press coverage and raised expectations regarding a potential 9-month extension that the market may be disappointed by any move short of it.
But a 9-month extension is far from a sure thing. Our discussions with OPEC friends have conveyed that other OPEC members are cool to the 9-month extension option and reluctant to sign on to a full year of cuts. Over the last month, Minister al-Falih and his team have been conducting meetings and other discussions with other producers to gain support for the 9-month extension, and we expect these consultations will continue right up to the meeting itself.
We think the 9-month extension is possible but give it only about a 30 percent chance of success.
Instead, we believe a likely minimum base case is a 3-month extension beyond the current deal’s expiration date of March 31, 2018. The 3-month extension would bring the deal to June 30, 2018 or just prior to OPEC’s first meeting of 2018 in late May or early June when OPEC will be in position to reassess the situation again at that time.
As we enter OPEC month, we expect to see additional comments from OPEC Ministers and officials regarding potential options for action that the group may take at the November 30 meeting. Already, several possible scenarios have been expressed. As a result, we’ve put together the Hedgeye OPEC Options Tracker to help make sense of the various trial balloons and proposed options. Please contact firstname.lastname@example.org for access to the tracker.