Hedgeye hosted client lunches in New York and Boston on Thursday and Friday this past week featuring former OPEC President and Algerian Energy Minister Chakib Khelil. The following is recap of some key points Khelil made during the lunch in his presentation and during Q&A.
- Staying the course at the June OPEC meeting. While the production cut deal between OPEC and the non-OPEC producers was approved for all of 2018, the Russians did insist on a review of the deal at the June OPEC meeting. But Khelil sees OPEC sticking with the production cuts after the June meeting for the rest of 2018.
- Another short-term extension for 2019! The biggest takeaway from Khelil was that he thinks the Saudis will continue to push for production cuts in 2019 due to their desire for $70-plus oil prices, and therefore, he believes OPEC will approve another short-term extension of the cuts for 2019 at the November OPEC meeting.
- Russia critical component to Saudi oil strategy but leans against 2019 cuts. He said the Saudis believe it is critical that Russia stays in the deal for any extension in 2019 but this is very much a big open question. In Khelil’s view, even Russia probably doesn’t know the answer yet. He also pointed out that Russian Energy Minister Novak has made many public comments about the need to wind down the production cuts in 2019 so it would seem for now that Russia is leaning against participating in cuts in 2019.
- Market comes in to balance 2H 2018. Khelil believes production data and forecasts from EIA, IEA and OPEC all point to the market coming into balance in the second half of 2018 with prices rebounding to the $70-range at year end. He also expects shale growth to slow in the second half of the year and in 2019.
- Emerging Iran – Saudi split on oil prices and OPEC policy. Khelil said recent comments by the Iranian oil minister that Iran prefers oil prices at $60 to discourage US shale production is in direct conflict with the Saudi immediate strategy to push prices above $70 for the Aramco IPO. He expects Iran to begin expressing this viewpoint at the next OPEC meeting but still believes OPEC will maintain production cuts at least until the end of 2018. The next big showdown with Iran could come at the November OPEC meeting.
- US sanctions on Venezuela and Iran are possible before June OPEC meeting. Khelil believes the departure of Secretary Tillerson almost ensures that the US will now reimpose US sanctions on Iranian oil exports in May. He also believes there could be continued declines in Venezuela production and possible US sanctions on Venezuela crude sales. One or even both developments could push prices higher right as OPEC meets in June. He believes Saudi Arabia will be unofficially pleased with higher prices caused by these supply disruptions but it could also weaken compliance of the OPEC deal as other producers try to take advantage of the market opportunity.
