Takeaway: Bulls Juggling Key Events - Calgary Cuts; Qatar Bolts OPEC; Russia-Saudi Deal to Extend Cuts; 1.3 mbd Cut Consensus; Trade Detente

OPEC NOTES: OPEC Cut Consensus Forming Despite PR Setback with Qatar Exit - bulls juggle

OIL/OPEC NOTES - Dec 3: Bulls Juggling Key Developments - Alberta Starts Cuts; Qatar bolts from OPEC; Russia-Saudi Agreement to Extend Deal; Cut Consenus Forming; US-China Trade Détente

VIENNA, AUSTRIA – Good morning from Vienna where we are on the ground early for the OPEC meetings on December 6 & 7 and all signs point to a big production cut. Oil prices are on the rise in early morning trading as ministers begin arriving in Vienna tonight but many of their staffs are already here working in advance of the official meeting.  

As we forecasted last week, the meeting between President Putin and Crown Prince Mohammed Bin Salman at the G20 in Argentina nailed down Russia’s participation in the extension of the OPEC+ production cuts.  The Putin-MBS agreement was the first concrete sign that OPEC is moving toward a significant production cut to address a forecasted 1H 2019 production surplus and reverse sentiment that has sent prices down about 30 percent since October. Since then, we’ve seen the US-China trade war détente; Alberta’s decision to cut production and Qatar’s announcement to leave OPEC.  

Oil traders are juggling and trying to make sense of several developments going at hyper-speed as we begin a crucial week for oil markets. We will send an edition of “OPEC Notes” each morning to provide a summary and analysis of key developments.  Please also follow our updates in real time on Twitter @joemcmonigle.

Key Events of OPEC Week

  • December 5 – Joint Ministerial Monitoring Committee meeting chaired by Saudi & Russian energy ministers
  • December 6 – OPEC meeting
  • December 6 – EIA Weekly Petroleum Status Report 10:30 AM Eastern Time (delayed one day due to former President George H.W. Bush memorial service)
  • December 7 - OPEC+ Ministerial meeting

 

Consensus Forming for 1.3 million barrels per day (b/d) Production Cut – OPEC’s Economic Commission Board has sent members its analysis of oil markets that recommends a cut of 1.36 million barrels per day from October 2018 production levels. Nothing at OPEC happens by chance so in our view this ECB cut recommendation is significant and likely represents the minimum cut we can expect this week.  

Russia-Saudi Agreement to Continue Cuts – “We have an agreement to extend our deal,” President Putin told reporters Saturday in Argentina as the G20 meetings concluded. We said in our client note last week that we expected the Putin-MBS meeting at the G20 to nail down a cut extension ahead of the OPEC meeting on December 6.  Until this weekend, Russia had given mixed signals to oil markets about its plans for production cuts. Putin’s full quote on oil markets (from the Kremlin’s official transcript): “Now about the price of oil and our agreements. Yes, we have an agreement to extend our deal. There is no final decision on volumes, not yet. But we, together with Saudi Arabia, will do this, and whatever final figure we will decide upon, we agreed that we will monitor the market situation and promptly respond to it.”  Our translation: Russia will go along with Saudi Arabia’s cut number but will have a line in the press release that says we will monitor markets and make adjustments if necessary.  We expect Russia to contribute cuts of about 300,000 b/d in the final agreement on par with its original commitments in the 2016 pact.

 

And Then There Were 14, As Qatar Bolts from OPEC – To start off OPEC week, Qatar’s new energy minister informed the OPEC Secretariat on Monday morning that it will quit the group in 2019. Qatar Petroleum’s twitter account confirmed the decision on Monday here, citing a desire to refocus on natural gas production and LNG exports. While some press reports attributed comments to the minister that it would no longer abide by OPEC production cut commitments in 2019, it is a non-event from a fundamentals standpoint. Qatar is a small oil producer and consistently produced about 620,000 b/d which is about its maximum sustainable capacity and only cut about 10,000 to 20,000 b/d in some months during the OPEC deal. While Qatar is a small producer in terms of OPEC’s task at hand, the news of its exit from the group presents a public relations and perhaps sentiment problem going into a crucial week for oil markets.

Calgary Cuts First – Alberta’s premier announced Sunday that it is mandating a crude production cut of 325,000 b/d to address a lack of pipeline take-away capacity and record storage levels. If Qatar’s decision to bolt OPEC hurt market sentiment, the Calgary cuts are sure to help boost both bullish sentiment and fundamentals. Alberta, Canada’s largest oil producing province, said it is currently producing 190,000 b/d more than be shipped with existing pipeline and rail capacity.  The government said it is mandating a 325,000 b/d cut until storage levels normalize and would review data monthly and adjust cuts accordingly. However, there seems to be some confusion about the record storage levels. The provincial statement said storage levels were at 35 million barrels and “about twice the normal levels” but the agency put in charge of administering the cuts, the Alberta Energy Regulator has said storage levels were closer to 75 million barrels. 

US-China Trade Détente – Markets are already reacting to the Trump-Xi dinner deal in Argentina that announced a truce in new tariffs and raised hopes of a broader deal in 90 days. There are certainly many details yet to be learned about exactly what was agreed to between Trump and Xi.  However, the détente in the US-China trade war is potentially good news for oil demand and the timing could not be better for OPEC as it meets on December 6 and tries to reverse the downward trend in oil prices.

Hedgeye OPEC Meeting Preview Call Tuesday with former OPEC President – Hedgeye’s OPEC Meeting Preview conference call is Tuesday morning, December 4 at 10:00 AM with former OPEC President & Algerian Energy Minister Chakib Khelil. Former Minister Khelil will join us from Algeria to provide his views on oil markets and next steps for OPEC at the December 6 meeting. Hedgeye’s senior energy policy analyst Joe McMonigle will moderate the call from Vienna. Click here for dial instructions and more call details or contact