A month is a lifetime in oil markets.
In mid-October, Saudi Arabia and its OPEC allies began pushing a 9-month extension of its production cut deal through all of 2018. As a result, Brent prices rose above the magic $60 mark and the market priced in the 9-month extension.
All had been going to plan since the Spring OPEC meeting underwhelmed expectations causing Brent prices crashing to $45. The Saudis instituted exports cuts to the US in July that were contributing to crude inventory draws in EIA data and rig counts that had fallen by 4 percent since July 28.
But by early November the OPEC plan hit a road bump as US oil rigs increased for the first time since late July. For the week ending November 10, US oil rigs rose by 9 to 738 total rigs. At the end of last week (November 22), US oil rigs added another 9 to 747 total rigs.
While the market was not spooked by the recent rising US rig counts, OPEC seems to have hit the pause button about the rush to a full 2018 year of production cuts.
Just two days before OPEC’s meeting, it’s clear that US shale’s shadow is looming large over the delegations arriving today in Vienna.
There is concern among some members and non-OPEC producers in the deal about how shale reacts to a full year of cuts in 2018 with Brent prices already above $60. An OPEC technical committee heard last week from several different oil analysts who gave vastly differing opinions on non-OPEC US shale production in 2018.
This is not a new development. When I briefed the OPEC Secretariat last March, they -- as well as many others -- were struggling then about what to make of US shale production. I commend OPEC for wanting to hear from all opinions and forecasts and not just forum-shopping on a view.
With the Aramco IPO coming up in 2018, the Saudis have turned into activist managers of oil markets and price hawks. OPEC is very cautious by nature on key decisions on issues of production but the Saudis are still pushing for the longest possible extension of cuts.
At a speech this morning in the UAE, Saudi Oil Minister Khalid al-Falih admitted there were differing opinions about the deal extension but said the debate would lead to a consensus at the November 30 meeting.
Even before US rig counts restarted its climb, we reported in our October 31 client note that other OPEC members and non-OPEC producers in the deal were cool to the idea of a full year of continued cuts.
With all the mixed signals coming from OPEC and the Russians, we think the market will be relieved by any production cut extension.
We are not buying into the theory presented by some analysts that OPEC may conclude the November 30 meeting without any agreement on an extension of production cuts. No extension decision at the meeting would see a negative market reaction, and therefore we think it is a very unlikely scenario.
Instead, we believe we are past the point of whether there will be a cut to how long the cut extension will be. A 9-month extension is still a possibility but we continue to believe there is already 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.
