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Takeaway: KICK THE CAN: Iran Opposition Likely Means Delay of Formal OPEC & Non-OPEC Charter; & OPEC Provides Helping Hand to US Shale

OPEC NOTES MONDAY: Iran Oks 9-Month Cuts Extension But Not Influence of Non-OPEC Partners - 6832145F D80E 4917 971D 0EBCB8FEB1FD

VIENNA, AUSTRIA, July 1, 2019 - Hedgeye’s Senior Energy Policy Analyst Joe McMonigle in Vienna for the OPEC+ July 1 and 2 Meetings is publishing daily “OPEC Notes” for clients on Sunday, Monday & Tuesday (July 30 - July 2), in addition to his longer more in-depth client notes. Today’s edition of OPEC Notes is below.

Iran Oks OPEC+ 9-Month Extension of Cuts But Not Influence of Non-OPEC Partners
Iran’s oil minister ended the OPEC cliffhanger on the length of the rollover by saying he did not oppose the 9-month extension of cuts. While Iran and other member countries are somewhat antagonized by what they view as “unilateral” decision-making by Saudi Arabia and Russia, the producers collective self-interest in supporting oil prices means they have little choice but to agree to a longer rollover of cuts. But Iran’s oil minister told reporters he would oppose an attempt to formalize a charter with non-OPEC creating some doubt about longer-term cooperation between the two groups of producers. Oil prices rose on the news that Iran would not oppose the effort that likely ensures a 9-month rollover of cuts into Q1 2020. The longer extension is an attempt by OPEC to get ahead of the market and weakening demand forecasts for next year. It’s a smart move that likely puts a floor on prices absent a major stumble in the global economy. It’s also a low risk strategy since Q1 is a typically a low demand period, and OPEC can revisit the policy at its next regular meeting in six months time in December.

OPEC+ Longer Extension Is Good News for US Shale Production
A longer 9-month extension is a bit of a surprise move and creates some bullish lift for oil prices. It’s hard to see the expected OPEC decision has anything but a big win for US shale producers as well. Amid concerns about weakening demand and lower prices, US producers faced prospects that capital would become more difficult or even exit the sector. In our view, there was little evidence that producers were having any challenges in obtaining capital to continue supply growth but OPEC is sending a helping hand by trying to create a price floor. Setting aside the crude quality issues that we fully accept, US shale production is contributing to the oversupply narrative that OPEC will see as a continuing challenge.

Russia Updates Talking Points 
Russia’s recent turn-around on accepting a rollover and now even a longer extension of cuts is being explained in new talking points from officials. Russian producers hate the cuts which they see as curtailing new production projects and risks losing market share to US producers. But the head of Russia’s Sovereign Investment Fund said at the G20 meeting that higher oil prices have generated more revenue for his fund and therefore is a good objective. Energy Minister Alexander Novak also said they can support the longer 9-month extension because it is hard to hike production do to weather conditions in Q1 in Russia. Of course, this is an updated talking point since early this year when Russia blamed its lack of compliance with the cuts on Q1 weather conditions. Talking points aside, we said in a June 20 Hedgeye client note that we had expected Russia to support the rollover at least in principle but question is whether Russia will comply with its commitment in the extension of 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. Despite the updated talking points and approval of the rollover, Russian producers are eager to hike production.

Breaking News: Next OPEC Meeting in December
With the 9-month extension nearly in hand, Secretary General Mohammed Barkindo said in what passes for breaking news here that OPEC’s next meeting will likely be in December. Of course, the OPEC meeting is generally in December or late November but it comes on the heels of the meeting dates drama that saw the usual June meeting getting moved to July. Reporters and analysts should be wary about booking flights just yet.