Editor's Note: Below is an abridged research note by Hedgeye Energy Policy analyst Joe McMonigle. If you would like access to his institutional research email firstname.lastname@example.org.
OPEC’s Joint Ministerial Monitoring Committee meets this weekend in Jeddah, Saudi Arabia to assess compliance under the December cut agreement and review market conditions.
A month ago we thought that we might see some signs out of Jeddah about what OPEC may do a month later at the full June OPEC meeting in Vienna. But now our assessment is that we will not get any clarity from Sunday’s meeting as to future OPEC decisions on adding supply or extending the cuts.
Reported attacks on Saudi pumping stations and tankers and now the official Saudi statement Wednesday leveling blame at Iran for the attacks likely means the start of a couple acrimonious OPEC meetings and even more geopolitical risk for oil markets.
In terms of messaging we will probably get a repeat of the March JMMC meeting where Saudis emphasized keeping markets stable while still tip-toeing around extending the cuts which expire in June through the end of the year. The Saudis want to extend the cut agreement but the Russians are still undecided.
In our view, the three big takeaways from Sunday’s JMMC meeting will be:
- Over-compliance on actual production cuts under the December agreement, largely due to deeper cuts by Saudi Arabia and UAE and drastic involuntary cuts from Venezuela (although Venezuela was exempt from the cut commitment). In March the JMMC said compliance in February was at 90 percent. We estimate that current production levels have OPEC back in over-compliance mode – very similar to last year’s June OPEC meeting. At that June 2018 meeting, OPEC scrambled to provide a framework to allow more production within the allowable quotas with Saudi Arabia, UAE and Russia raising production levels to address rising prices and Trump oil tweets. We could see a repeat of last year’s moves at the June 2019 meeting but the Saudis are pursuing a different strategy (see #3).
- Russian resistance to extending cuts through 2H 2019 continues, as we saw in comments this week by Russia Energy Minister Alexander Novak. If it were up to Novak and Russian oil companies, they would not extend. But Putin likes the international limelight Russia receives with OPEC cooperation. However, we see a new issue emerging from Russia involving concern about surging US production (past Russia as the largest producer) and the role the OPEC cuts and higher prices play in providing incentives for more US production. We will write more about this in a future note but the Russians are increasingly concerned about market share.
- Saudis stick to new destocking strategy to further drain global crude inventories, with special emphasis on reduced exports to the US to affect EIA weekly data. Saudi minister Khalid al-Falih has publicly expressed concern about rising crude stocks and the need to reduce them. Saudi exports to the US have been declining this year and we believe will decline even further before the June OPEC meeting. Remarkably, there’s been no change in Saudi actions since Iran waivers were not renewed by the US, which we believe is evidence of how committed the Saudis are to the destocking strategy. Beware of twitter rumors about Saudi production hike to offset Iran. You may see Saudi production rise as is generally the case each summer to meet domestic power needs but we do not believe there will be any increase in exports. From a messaging standpoint, the Saudis may try to get a two-for by hike production to meet domestic needs and show Trump they are responding with higher production.
The next month leading up to the June OPEC meeting will be dominated by Iran. The US policy of maximum pressure on Iran means maximum pressure for oil markets, and the number of geopolitical events are only rising as we head into the high-demand summer season. As a result, we see Brent prices rising above $75 as we approach the June 25 meeting.