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Takeaway: Cut “Most Likely”; Recriminations but resignation about need for cuts; Qatar Sideshow; Russia Rudux (& Reduct); Khelil Sees 1-1.5 mbd Cut

Editor's Note: The following are excerpts from Hedgeye’s Daily “OPEC Notes” briefing from Senior Energy Policy Analyst Joe McMonigle who is on the ground in Vienna.

Saudi Minister Hints of “Most Likely” Cuts Ahead But Market Only Hears “Premature” - zzww

OPEC NOTES: - Saudi Minister Hints of “Most Likely” Cuts But Knee-Jerk Market Focuses “Premature” Comment; Recriminations But Resignation About Need to Cut; Qatar Sideshow; Russia Redux (& Reduct); Former OPEC President Predicts 1-1.5 mbd cut

VIENNA, AUSTRIA – Good morning from Vienna where the market seemingly has ignored Saudi Energy Minister Khalid al-Falih’s hint about “most likely” cuts while instead focusing on the minister’s attempt to avoid making news as well as continued reports about Russia’s reluctance to cut.

“OPEC Notes” will be published each morning to provide a summary and analysis of key developments from Vienna.  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

Saudi Minister Says Cuts “Most Likely” But Market Has Knee-Jerk Market Reaction to “Premature” Headline - Oil prices lost some steam in early trading today after Bloomberg TV’s interview with Saudi Energy Minister Khalid Al-Falih on the sidelines of the COP 24 Climate Conference in Poland. Al-Falih said it was “premature to say what will happen” at the OPEC meeting this week, which frankly is what we expect him to say to the press before having a chance to discuss the issue and hear from other OPEC members in Vienna.  But the “premature” headline sent prices lower in intraday trading.  We urge you to watch the video of the interview because it’s clear that al-Falih is trying not to makes news and be respectful about “listening” to his colleagues. We think the bigger news in the interview was al-Falih’s seemingly unintentional hint about “most likely” cuts. Again we urge you to watch the interview (at the 1:32 mark) where al-Falih says: “We need to figure out what needs to be done and by how much. Mostly likely, most likely they [the cuts] will be.” The reporter then immediately asks about “how much”, and al-Falih reverts back to trying to avoid making news.

Recriminations But Also Resignation About Need to Cut – There is a lot of talk and criticism from OPEC delegates about Saudi Arabia’s recent hikes in production ahead of the US election, and it is cited by many here as a major reason for the price decline. We expect to hear more on the topic in the press in the coming days. But while the recriminations are certainly present, there is also a resignation among delegates that prices are too low and a cut is needed.  In our view, Saudi Arabia will certainly have to endure some criticism about the Trump Pump, but OPEC members will ultimately back the cut because they have little choice and need higher prices.

Russia Redux (& Reduct) – “We have an agreement to extend our deal,” President Putin announced in Argentina last weekend. But press reports about Russia’s reluctance to cut or instead wanting to cut a lower amount are making the market nervous. We’ve seen this movie before and it always ends the same way. Russia creates noise ahead of these meetings that create uncertainty but in the end it always cooperates. We suspect some of this positioning is for Russian oil companies who have traditionally been opposed to cuts. We expect Russia to contribute closer 300,000 b/d in cuts in the final agreement on par with its original commitments in the 2016 pact. Russia will want a commitment in the communiqué about monitoring the market and adjusting as necessary.

Qatar Sideshow About GCC Spat Not OPEC – Vienna is still consumed by Qatar’s decision Monday to exit OPEC in 2019. Since Qatar is a relatively small producer, its exit is a non-event from a fundamentals standpoint. But much of the analysis and press reports now say the exit may signal further exits of other small producers who feel ignored or even the end of OPEC itself. We have the opposite view. First, the Qatar exit is about the spat between Qatar and other members of the Gulf Cooperation Council and really has nothing to do with OPEC.  Second, while you certainly hear complaints from smaller members, OPEC gives them an important platform and attention that they would not have otherwise. All one needs to do is to hang out in the lobby of the Park Hyatt hotel in Vienna to see the press follow and hang on the every word of the Minister from Ecuador.

Former OPEC President Forecasts Cut of 1 to 1.5 mbd in Hedgeye’s OPEC Preview Call – Hedgeye held its OPEC Meeting Preview conference call Tuesday morning with former OPEC President & Algerian Energy Minister Chakib Khelil who predicted an OPEC cut of between 1 to 1.5 million b/d.  Khelil said he believes Russia and Saudi Arabia will come to terms and agree to contribute the bulk of the cuts. However, Khelil does not think the cut will push prices higher than a range in the mid-$70’s. He also said it is unlikely that OPEC will reverse course and go back to the 2014 “open the taps” production decision to try to depress US shale. He said OPEC learned its lesson and won’t want to repeat an experience where shale survives and comes back again while OPEC members lose revenue from depressed prices.