As we said in our Tuesday note, OPEC has hit the pause button on the rush to a 9-month extension. Ministers and delegations began arriving in Vienna on Tuesday, and it’s becoming clear that only one OPEC+ country is strongly pushing the 9-month extension. Hint: they have an IPO planned in 2H 2018.
While ministers were conducting bilateral meetings on Tuesday at their respective hotels, an OPEC technical staff committee was developing a compromise proposal that was being billed as a 9-month extension that would be reviewed after 3 months at the May/June OPEC meeting next year. This way Saudi Arabia gets a win of 9-months, and Russia can tell its oil companies they are only committed for another 3 months of cuts.
If Ministers approve the plan at Thursday’s meeting, the public relations and wording of the press release will be enormously important. The press conference will be conducted by Saudi Minister Khalid al-Falih, Russian Minister Alexander Novak and OPEC Secretary-General Mohammed Barkindo.
We expect OPEC will certainly promote the decision as a 9-month extension with a review after 3 months. In our view, the “review” is really an option to cancel after 3 months.
It will be important to monitor how the Russians portray the decision to their press corps as Russian media stories could undermine the 9-month extension narrative.
Regardless of the word play or emphasis, the reality is it is only a 3-month extension which is exactly what we forecasted in a client note on October 31. In that note, we said the 9-month extension was getting a cool reception from other OPEC+ members and the more likely scenario was consensus for a 3-month extension. This is where the situation stands today in Vienna.
For the Saudis, the 9-month extension is critical because the Aramco IPO is planned for the 2H of 2018, and they want the production cut agreement to still be in effect during the IPO. The outcome of the OPEC meeting on Thursday could also have the potential to change the timing of the IPO to 1H 2018.
Meanwhile, Russian Energy Minister Novak made a late arrival in Vienna about noon local time today which is adding to the OPEC drama.
Today the OPEC and non-OPEC Joint Monitoring Committee is meeting to discuss compliance under the agreement. This is a minister-level meeting and we could see another statement about the compromise 9-month/3-month extension.
As bilateral meetings continue this afternoon and a ministerial dinner tonight, the final outcome very much fluid.
Libya/Nigeria Exemptions – Another issue we are closely monitoring is the continued move to lift the exemptions for Libya and Nigeria from the production cut deal. We also indicated in our October 31 note that we saw this potentially gaining traction as many other OPEC members are frustrated by the increased production from both countries. Nigeria has all but accepted this fate but Libya continues to fight lifting the exemption. However, with the possibility that the market will be disappointed by the extension duration, OPEC will view lifting the exemptions as important for market sentiment. In practice, we would not expect any cuts to production from either country but instead would look for a cap on current or highest production levels over the past year.
