OPEC NOTES DEC 5: - OPEC deal forming for 1.15-1.30 mbd cuts but without Iran cuts; Russia wants lower cut allocation; US oil sanctions on Venezuela unlikely
VIENNA, AUSTRIA – Good morning from Vienna where a deal is forming around cuts of between 1.15 to 1.30 million barrels per day (b/d) depending on the final agreed cut from Russia. But we are learning that Iran will likely keep its exemption from cuts - which means the actual OPEC cut will be much higher when you add in lost Iran barrels from US sanctions. In our view, an OPEC cut deal is very likely or as Saudi Energy Minister Khalid al-Falih told Bloomberg TV on Tuesday “most likely.”
“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
- TODAY, 2:00 PM (Vienna Time) – Joint Ministerial Monitoring Committee meeting chaired by Saudi & Russian energy ministers
- December 6 – OPEC meeting (Press Conference schedule 1:30 PM Vienna Time)
- 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
OPEC Deal Forming Around Cuts of 1.15-1.30 million b/d – We believe an OPEC cut deal is very likely, and the Saudi minister himself said it was "most likely." But the question is how much. The current state of play in Vienna this morning is that a deal is forming around 1.15 to 1.30 million b/d but the actual cut number may be much higher when you include exempted Iran cuts from US sanctions (see next bullet). The 1.3 million b/d number you keep hearing about is the collective forecast of oversupply in 1H2019 but this estimate may change during the JMMC meeting this afternoon in Vienna. The goal is for OPEC to match it or get close to the estimated oversupply amount. Meanwhile, Russia is still trying to get a lower agreed cut allocation – 150,000 b/d instead of 300,000 b/d. The Saudis are pushing Russia to sign on for the bigger number for market psychology reasons and would give the Russians flexibility to phase in cuts over the 1H (as they did in 2017). This is still a fluid situation so the announced cut range is 1.15 to 1.30 million b/d depending on the size of the Russia cut.
OPEC Cut Likely to Include Iran Exemption - Iran has been making it clear in media interviews that it does not intend to agree to any cuts in its allocation so we are hearing that it will maintain its exemption under the deal. The exemption is likely the only solution to get Iran not oppose the deal. But it also gives the Saudis the ability to portray the OPEC cuts as a smaller and more proportionate cut to matching oversupply forecasts than it actually is. We estimate Iran cuts to be about 400,000 b/d in November from the October pre-sanctions baseline. (Reuters estimate is 500,000 b/d and Platts is 300,000 b/d.) So the actual OPEC cuts with Iran included are higher in the range of 1.55 to 1.7 million b/d.
Venezuela oil sanctions unlikely – Platts has a story this morning reporting that the Trump administration is reviewing US sanctions on Venezuela oil exports, according to administration sources. This idea was rebuffed previously by President Trump due to his concerns about its impact on oil prices. However, Venezuela hawks in the administration are hoping current lower oil prices might give the initiative a new opening. While we don’t doubt Platts is accurately reporting what its sources have said, we think it is very unlikely that such a decision will be made. Moreover, we think President Trump would nix any decision recommendation from the NSC again due to potential impacts on oil prices, especially while his Iran sanctions are playing out. By the way, Venezuela’s energy minister is slated to become OPEC’s new President in 2019.
