OPEC’s Joint Ministerial Monitoring Committee (JMMC) meets in Jedda, Saudi Arabia on Friday to review compliance of the organization’s production cut deal with other non-OPEC producers. The co-chairs of this OPEC committee are the Saudi energy minister Khalid al-Falih and Russian energy minister Alexander Novak. Therefore, we expect further discussions on oil market management and strategy that will attract robust press coverage. So there is great potential for headline risk on Friday.
So here is what we believe will be the likely outcomes:
1. Compliance is excellent but give OPEC Man of the Year Award to Maduro.
The mandate for the meeting is to review compliance, and here the OPEC committee will take a victory lap that their production cut plan is working as designed. We agree that compliance is strong and fundamentals will further point to a balanced market in the 2H 2018. But OPEC should consider giving a “Man of the Year” award to Venezuela President Nicholas Maduro as Venezuela’s production is down by 800,000 barrels per day b/d from 2016. Venezuela production in March was 1.49 million b/d but its allowable production under the OPEC agreement is 1.975 million b/d. Venezuela continues to lose production by about 50,000 b/d each month and we expect production to fall another 500,000 b/d this year. Look for a more focused Venezuela note from us in the coming days.
2. Saudis will reject press report of $100 price target.
The question I’ve been asked most this week from clients has been about the Reuters report attributed to unnamed Saudi sources that the Kingdom is targeting $100 price for oil. It makes for a sexy headline in oil markets but please disregard this report. As we said in our note after the November OPEC meeting, the Saudis are now price hawks due to the upcoming Aramco IPO. But even the Saudis realize $100 oil is not the cards anytime soon absent some military conflict that would affect physical oil supplies. We expect the Saudi Minister to reject the $100 price target report post-haste. The Saudi oil minister beat back a similar Bloomberg report from last week that said the Kingdom had an $80 price point. We think $80 is actually more realistic especially when you add near-term geopolitical risk to physical oil supplies (Venezuela, Iran, others). Look for a note from us on the prospects for $80 in the coming days.
3. Despite victory lap - no brakes on production cuts.
The JMMC is not charged with making recommendations about future policy on the production cut deal but that doesn’t mean ministers won’t comment on next steps. The market will be paying close attention to comments from the Saudi and Russian ministers. We expect little if any comments from ministers about ending the deal prematurely. If anything, we will likely see comments about a possible 3-month extension into 2019 and more public discussion about some vague continuing cooperation between OPEC and non-OPEC producers for the next several years. You may ask why continue the cuts if the overhang in crude stocks has been reduced to OPEC’s target. OPEC ministers will cite continued uncertainty about demand. As price hawks, the Saudis are not really concerned about overshooting the market now. As we said in our February note “Report from Riyadh” the Saudi minister will err on the “safe side” explaining that he would rather cut too much instead of too little. We think a 3-month extension in 2019 is a good probability but look for a note from us in May to preview the next OPEC meeting in mid-June.
