OPEC held their Joint Ministerial Monitoring Committee (JMMC) meeting in Oman today to assess compliance under the production cut agreement. The JMMC took a victory lap on a successful end to 2017 but most of the headlines coming out of the meeting highlighted the Saudi Minister’s comments about continuing “cooperation beyond 2018.”
Since Saudi Minister al-Falih is now co-chair of the JMMC with Russian Minister Novak, we are going to see comments about extending the deal, or in the case of the Russians not extending it, about every two months at these JMMC meetings.
With the Aramco IPO coming this year, the Saudis are now like an activist investor on oil prices and so we will continue to see bullish comments and verbal intervention from them throughout the year.
Therefore al-Falih's comments are not surprising and especially now. Most analysts including OPEC believe we will start to see a surplus build again in Q1 and Q2 of 2018. In addition, we think it is likely that EIA will report December monthly US crude production near or at 10 million b/d and on its way to surpass Saudi production in 2018.
On the same day as the OPEC November 30 meeting, EIA released its data showing September monthly US production had risen to 9.48 million b/d. The October data showed production climbing further to 9.64 million b/d.
With the IEA and OPEC reports last week, all three forecasting agencies all point to robust non-OPEC production in 2018 with US shale leading the way. We believe this US production narrative will dominate the discussion at least through 1H 2018 and weigh on prices.
Minister al-Falih acknowledged the OPEC predicament in comments today: “We’re uncertain that the pace of inventory drawdown will continue in the coming months.”
By suggesting that the oil production cut agreement may extend beyond 2018, al-Falih is keeping the oil market on its toes. In reality, we think there is very little chance of continuing the deal into 2019, especially from the non-OPEC side. Several non-OPEC ministers have told me they cannot continue in the agreement past 2018 and even 2018 will be difficult.
More likely what Minister al-Falih means with his comments about "a readiness to continue cooperation beyond 2018" is that the Saudis will try to keep the band together of after this world tour. OPEC Secretary General Barkindo has previously discussed over the last year a goal of institutionalizing the OPEC and non-OPEC cooperation. So Minister al-Falih is endorsing this idea with his comments at a well-timed moment.
