Editor's Note: This is an excerpt from a research note written this past Friday by Energy Policy analyst Joe McMonigle.
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.
Since an October 17 Reuters report citing “four OPEC sources” who said the group was “leaning towards extending a deal…to cut oil supply for another nine months,” oil prices surged above $60 and the market priced in a 9-month extension.
But as 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 a result, the Saudi/Russia team has been unable to get consensus for a 9-month extension.
While work continues on the 9-month extension goal, it’s now clear that OPEC needs to re-set market expectations. As a result, the Russians have been playing along and openly discussing whether any extension decision is needed and causing jitters about the upcoming November 30 meeting.
As a result, OPEC hopes 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 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 next moves.
