Editor's Note: Below is an excerpt from a research note written by Energy Policy analyst Joe McMonigle. For more info on our institutional research email firstname.lastname@example.org.
Markets must contend with not one but two big international meetings that will serve as catalysts for oil prices – the G20 meeting this weekend in Buenos Aires and the OPEC meeting December 6-7 in Vienna. As a result, we are seeing considerable headline risk surrounding these meetings so we try to help interpret all the noise impacting oil prices.
Over the last two days, we have heard from President Putin and other Russian officials that $60 oil is just fine by them, which suggests that there is no need for an OPEC+ production cut next week.
Saudi Arabia’s Crown Prince Mohammed Bin Salman (MBS) is leading the Kingdom’s delegation to the G20 and has brought Energy Minister Khalid al-Falih along on the trip highlighting the key significance for oil markets.
News reports this week indicate that Minister al-Falih has emphasized in recent days that the Kingdom is seeking to “stabilize” oil prices. Make no mistake: in Saudi speak, “stabilize” in this case means higher prices (in a $75-85 range).
We definitely think the Putin/MBS meeting at the G20 in Argentina will nail down Russia's participation in the OPEC+ cut. Russian production, currently up about 300,000 barrels per day (b/d), is not really sustainable at these elevated levels over the past few months anyway and is already declining. But the Russians are maneuvering to get some additional commitments from the Saudis in exchange for cooperation, perhaps some new investment or collaboration.
From the Saudis perspective, Russian participation and co-leadership is critical because it brings another big non-OPEC producer into the market management business.
However there’s another person who thinks he is also in the market management business and that’s President Trump or “President T” as he recently referred to himself in a tweet taking credit for lower oil prices.
There is also a new political risk injected into the market by Trump’s supportive comments about Saudi Arabia and MBS. The thinking is the Saudis may not cut as much or at all if it might erode Trump’s support. But we take the opposite view and think Trump’s support gives Saudi Arabia running room to pursue self-interested policies.
Despite market intervention comments from "President T", we think the Saudis revert to a Saudi Arabia first oil policy (as we wrote in our Saudi Arabia First client note on November 21).
Minister al-Falih is clearly leading the effort to produce an agreement for a collective OPEC+ cut at the Dec 6 meeting in Vienna. We think current low oil prices have made his work much easier and expect wide agreement for OPEC to take action to address its own forecasts of slowing demand growth and a supply surplus in the first half of 2019. Even Iran will be supportive of a production cut.
Nothing we heard over the last two weeks changes our view that Saudi Arabia will continue with plans to cut production in December nor our forecast of the upcoming December 6 OPEC meeting resulting in a production cut in excess of 1 million barrels per day.
Still unclear is how OPEC will package its cut and what will be its baseline. At current production rates, we could see a massive cut. For example, a news report this week said Saudi Arabia production in November hit a record peak of 11.3 million b/d to meet demand from Iran’s former customers and to demonstrate that it could produce at such a record level.
Due to seasonal demands and previous production rates, it seems hard for us to see Saudi Arabia producing more than 10 million b/d in January. If you accept that Saudi November production was as high as 11.3 million b/d, then we are looking at a cut of 1.3 million b/d from Saudi Arabia alone in January.
No matter how the OPEC production cut is packaged to try to soften the blow for Presidents Trump and Modi, the math will be easy. The only fuzzy math for oil markets to analyze will have to do with US-China trade war implications but perhaps we may get some signals on this situation at the G20 as well.
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