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Takeaway: SUNDAY EDITION: Putin at G20 Scoops OPEC Meeting on Rollover But Question on Russian Compliance Remains

OPEC NOTES: “Most likely 9-months” Extension of Cuts, Says Saudi Minister - Russian oil cartoon April 2019

OPEC+ Now 6-Months+ To Address Weakening Demand Forecasts Next Year

On arriving in Vienna early Sunday morning, Saudi Energy Minister Khalid al-Falih told reporters that the producer group will extend cuts “most likely nine months,” adding “my preference is for nine months.”  The move seems to try to get in front of and address concerns about weakening demand going into next year. It is a bit unusual for OPEC to get too far in front of the market as the group likes to respond to events as they happen. We think this is clearly a move orchestrated by Saudi Arabia to support current prices amid forecasts of lower demand or at least try to keep a floor in place. It is probably a low risk strategy since demand is typically low in Q1 and OPEC can revisit the cut extension at the usual six months time when it meets again in December. Of course, Al-Falih noted that a decision to extend by any length must be agreed by all ministers, and those discussions would begin today. We have previously said that a 9-month cut extension instead of 6-months will be viewed as a bullish move by markets. OPEC is counting on it.

OPEC+ Meeting Delayed for Putin/MBS Oil Market Management Meeting at G20

About one month ago, Russia requested a delay in the OPEC+ meeting from late June to early July citing a schedule conflict with the G20. Most OPEC ministers were confused since energy ministers rarely participate in G20 meetings. But now we know the delay was for a meeting between Russia’s President Putin and Saudi Crown Prince Mohammed Bin Salman (MBS). Russia Energy Minister Alexander Novak had been publicly non-committal to the rollover of the production cuts suggesting that he needed to see how events unfolded at the G20. On Saturday, President Putin ended the suspense by declaring that Russia supported the cuts extension and scooped the OPEC meeting by hinting it could be for “6 to 9 months.” Hedgeye clients will remember our June 20 client note that said we had expected Russia to support the rollover - at least in principle. Russia had been hesitant to extend the cuts as its energy companies oppose the rollover and want to hike production. But Saudi Minister al-Falih's successful marketing of the rollover during his early June trip to Russia has achieved its objective.  One of the deliverables of his trip was the announcement of a coming October Putin trip to the Kingdom that signaled to us Russia had already agreed to the rollover. We suspect additional Saudi investments in Russia's energy sector were also on the table. However, the real question, as we posed in our June 20 note, is whether Russia will comply with its commitment in the deal. Russia spent most of the last 6 months in non-compliance and only recently met its agreed cut in May due to the involuntary disruption from the contaminated pipeline. Russian compliance is the real cliff-hanger of a successful rollover of the cuts.

Deeper Cuts Trial Balloons

Both the Algeria and Iraq Ministers have floated the idea of the need for deeper production cuts in recent days in order to boost prices. On Sunday Saudi Minister al-Falih told reporters that he didn’t see the necessity for deeper cuts but instead preferred a longer extension into Q1 2020 when oil market demand is seasonably lower. But while there may not be an official announcement of deeper cuts, we picked up in discussions after arriving in Vienna on Friday that there will be a push to get greater compliance from producers now in non-compliance (hint Iraq with production 300,000 b/d over its agreed quota). This may be nothing more than pushing a bullish narrative as in our view Iraq is unlikely to change its production levels any time soon.