All of the OPEC ministers were singing from the same song sheet when they met with the press this morning prior to the closed session meeting in Vienna. Every minister volunteered support for a “9-month extension.” Saudi Oil Minister Khalid al-Falih had obviously spent considerable time twisting arms among his OPEC colleagues.
But Russia was looking for some “flexibility” for its oil companies who were opposed to a full year of additional cuts. “Making the decision now gives us flexibility to make other decisions later,” said Russian Energy Minister Alexander Novak at OPEC’s press conference tonight in Vienna.
Therefore OPEC developed a brilliant compromise that is a win-win: a full year extension with a review in June. This way Saudi Arabia gets a win of an extension for a full year, and Russia can tell its oil companies they are only committed for another 3 months of cuts beyond the current agreement.
When news broke during the day about an agreement for all of 2018, we issued a note of caution to wait and read the fine print. The press release and declaration of cooperation are available on OPEC’s website but Novak won important language in it. See paragraph 3 in the declaration of cooperation: “In view of the uncertainties associated mainly with supply and, to some extent, demand growth it is intended that in June 2018, the opportunity of further adjustment actions will be considered based on prevailing market conditions and the progress achieved towards re-balancing of the oil market at that time.”
Two other key developments:
- OPEC is resetting the agreement to begin January 1, 2018 instead of April 1, 2018 so the extension can now be promoted as a full year or 12 months extension instead of 9 months.
- Libya and Nigeria have pledged to limit their 2018 production to be no higher than 2017. In essence, OPEC has lifted the exemption from the agreement for Libya and Nigeria although neither will make any voluntary cuts. It should be noted there is nothing in OPEC’s declaration of cooperation about this point. All we know of it was a pledge by both countries announced by Saudi Minister al-Falih at the press conference. You will recall that we forecasted the Libya and Nigeria exemptions would be lifted in a July 10 client note.
In addition, Saudi Minister al-Falih stressed compliance during his public remarks and announced at the press conference that he would become co-chair of the Joint Ministerial Monitoring Committee (JMMC) with other co-chair Minister Novak. This will allow Minister al-Falih to crack the whip on compliance which is expected to begin slipping in this third extension of the deal and amid higher prices.
Moreover, the fact that the JMMC, and now importantly, Ministers al-Falih and Novak will be its co-chairs means that in essence OPEC will have a meeting every two months (instead of just twice a year). As a result, there will be many more opportunities to review the agreement than just the June meeting.
Minister al-Falih made reference to this point when answering a reporters question at the press conference about an exit plan. “We will have plenty of opportunities to look at it this year to develop a scheme that is good for the market,” al-Falih said.
It will be important to monitor how the Russians portray the decision to their press corps as Russian media stories could undermine the full year extension narrative. But we noted Russian Minister Novak made no effort to highlight the "review" in June at the press conference tonight.
For the Saudis, the full year 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. Minister al-Falih added at the press conference that he is “bullish, if I can use that word.” The man has a big IPO coming up next year.
The market will probably approve of the OPEC's win-win decision B ut we could see some profit taking after some record long bets over the past few weeks. It may also take a few days for the market to digest the full meaning of the agreement.
However, OPEC got some bad news just as the meeting had ended and before3 the ministers walked into the press conference. EIA released its September monthly US crude production data showing a big increase to 9.48 million barrels a day. Talk about crashing the party. OPEC’s win-win may also be a win for US shale producers.
