Former OPEC President Tells Hedgeye TV “Not Rolling Over Cuts Is Not An Option”

06/27/19 06:42AM EDT

As OPEC prepares for its meeting next week in Vienna, former OPEC President and Algerian energy minister Chakib Khelil said Iran and Russia will be crosscurrents in the ministers’ discussions, in an exclusive interview with Hedgeye TV.

Khelil sat down for a 40-minute interview with Hedgeye TV in our Washington office on Tuesday afternoon.

Khelil said it will be difficult for OPEC to ignore the current geopolitical risk in the region. “There is an unusual and complex situation dominated by geopolitics mainly by what is going on in the Gulf because the Strait of Hormuz is very critical for transport of 20 percent of oil supply and 30 percent of LNG supply,” Khelil said. 

Still Khelil said that because of the “surge of non-OPEC supply mainly from US shale, we can easily see the call on OPEC oil is going to continue to decline,” and the “oversupply dampens the risks of geopolitics” in the market.

Khelil thinks the OPEC+ group has few options at next week’s meeting. “Not rolling over (the cuts) is not an option for OPEC.  For Saudi Arabia and other members of OPEC, they need a rollover because they want to maintain prices in a level more acceptable than $65 (per barrel for Brent).”

Khelil’s comments are in line with our view expressed in a note earlier this week that we think it is very likely that OPEC+ will extend the production cuts that expire on June 30.  It was announced earlier this month that President Putin will visit Saudi Arabia in October, and we believe the trip would not have been announced unless Russia had agreed in principle on supporting an extension.

Khelil also agreed with us that there should be no surprises with regard to a deeper cut or longer extension for the cuts. On the length of the cut extension, in our view it’s hard to see it going more than 6-months due to Russia’s concerns about the extension.  While certainly a longer extension will be more bullish for prices, we doubt Russia will go along.  Moreover, a six-month extension will coincide with OPEC’s winter meeting in early December, when we will see this scenario again.

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