Editor's Note: Below is an excerpt from an institutional research note written by Senior Energy Policy analyst Joe McMonigle. Email sales@hedgeye.com to read Joe's institutional research.
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 today.
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 the 9-month extension, 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 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. We forecast that the Libya and Nigeria exemption would be lifted in a July 10 client note.
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 it should be noted that there was no effort by Russian Minister Novak to highlight the review in June at the press conference today.
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 decision but we could see some profit taking after some record long bets over the past few weeks. It may 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 before 3 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.
