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Takeaway: Cuts Extended for 9-Months with Eye to Rollover for All of 2020 at December Meeting

OPEC NOTES Tuesday: Saudis & OPEC+ Target Greater Crude Stocks Draw Goal - 005D26DA 9A5B 4143 8B9A BDB9AA9AA367

VIENNA, AUSTRIA, July 2, 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.

Big Takeaway: OPEC+ Targets High Cruder Draw Range from 2010-2014
The biggest news from OPEC’s meeting here in Vienna was a new target for a draw in global crude stocks. OPEC’s new goal, announced by Saudi Minister Khalid al-Falih late Monday, is the average of the 2010 to 2014 range ditching the earlier metric of the 5-year average. The new target would require an additional draw of 250 million barrels from global stocks (see EIA chart above). The revised effort is designed to establish an even tighter physical market than the 5-year average range with the end-goal of achieving a more stable and higher price range. The Saudi-led initiative also hopes to demonstrate that the producer group is serious about challenge of meeting balanced oil markets. It is indeed a challenge because the 2010 to 2014 range occurred without surging US shale. In the last two years, US shale has added 3 million barrels per day to oil markets and is forecasted to grow by another 500,000 barrels by the end of 2019.

OPEC in New Active Market Management Mode With Eye on Extending Cuts Through All of 2020
The OPEC+ group’s rollover of the production cuts for a longer 9-month period to March 2020 ushers in a new active management mode of oil markets. An initial lift in prices fizzled Monday as the marathon OPEC meeting was drawn out over talks on the formal charter of the OPEC+ cooperation. We think prices will strengthen with better messaging today and an expected crude draw in the US this week. The longer 9-month extension is an attempt by OPEC to get ahead of the market and weakening demand forecasts for next year. By preloading the cuts into 2020, OPEC also hope to avoid a year-end price decline that typically occurs with these lower Q1 demand forecasts. 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 OPEC can revisit the policy at its next regular meeting in six months time in December. There’s already talk here that the December meeting may extend the cuts for all of 2020.

Barkindo Also Gets Rollover with New 3-Year Term as Secretary-General
The production cuts wasn’t the only rollover here in Vienna. OPEC Secretary General Mohammed Barkindo also was approved for a new 3-year term as the full-time leader of the group. In our view, this was another smart move to keep Barkindo in the job that he has really upgraded as a global energy diplomat and providing much needed assistance to Saudi Minister al-Falih. We recommend the excellent Wall Street Journal profile of Barkindo published just before the OPEC meeting.