Russia, an early proponent of extending the production cut deal, is now suddenly hesitant and sending mixed messages about whether it will support any extension of the production cut deal at the November 30 meeting in Vienna.
Some are calling this the “Moscow mystery.” We call it the OPEC playbook for re-setting expectations.
On October 18 when Brent was at $57, Reuters published a report that cited “four OPEC sources” who explained that “OPEC is leaning towards extending a deal with Russia and other non-members to cut oil supply for a further nine months.” The following week Brent moved above the magic $60 level and subsequently rose as high as $64 a week later.
Since the Reuters report and continued OPEC encouragement, the market has priced in a 9-month extension and will be disappointed by anything short of a full 2018 year of cuts.
But the Saudis and Russians now realize what we reported here first in an October 31 client note: other OPEC members and non-OPEC producers in the deal are cool to the idea of a full year of continued cuts. As of this writing, the Saudi/Russia team has been unable to get consensus for a 9-month extension.
While the Saudis are still working on their goal of a 9-month extension, it’s now clear they need to re-set market expectations. As a result, the Russians have been playing along and openly discussing whether any extension decision is needed at the November 30 meeting causing new market jitters about the upcoming OPEC conference.
As a result, the Saudis hope the market won’t be disappointed when a shorter duration extension is announced. A 3-month extension is better than no extension.
We don’t doubt that Russian oil companies are opposed to yet another extension of cuts but, as we have seen before, they will go along with whatever President Putin directs. It doesn’t much matter if Russian compliance falls behind in the coming months; the most important objective for Saudi Arabia is to continue the Saudi/Russia alliance on managing the oil market.
With the Aramco IPO coming up in 2018, the Saudis have turned into activist managers of oil markets and price hawks. They want to avoid a repeat of the May 2017 meeting when OPEC set expectations for potentially deeper cuts but only enacted a longer duration of cuts that resulted in disappointing markets and sending Brent crashing from $54 to $45 after the meeting.
No extension decision at the November 30 OPEC meeting would see a negative market reaction, and therefore, we think it is a very unlikely scenario. Instead, we believe there is consensus for a 3-month extension moving the expiration date to June 2018 and timed perfectly for OPEC’s mid-year meeting of 2018. OPEC will then have another six months to reassess market conditions and consider its next moves.
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Join us for a special call to preview the next OPEC meeting on November 30 with the former Algerian Energy Minister Chakib Khelil who also twice served as the President of OPEC.
CONFERENCE CALL INFO:
Monday, November 20, 2017
2:00 PM
Dialing Instructions:
Toll Free:
Toll:
UK: 0
Confirmation Number: 13673813
OPEC’s upcoming November 30 Ministerial Meeting in Vienna promises to be highly consequential to oil markets. The top of the agenda will be a decision whether or not to extend the production cut agreement and for how long.
Minister Khelil will take us inside the OPEC decision making process and discuss the following topics:
- His and OPEC’s view of current market conditions;
- Length of extension;
- Will Russia and other non-OPEC producers agree to an extension;
- Dueling OPEC and IEA demand forecasts; and
- Any OPEC surprises.
