Vienna will be busier than normal during the first week of December as not only OPEC ministers arrive for its winter meeting but also the IAEA will hold a special general conference to select its next Director-General. This means that Iran’s Foreign Minister Javad Zarif will be in Vienna with US sanctions on Iran and the nuclear deal mixed into oil headlines.
For OPEC, the situation is more fluid than normal before a meeting over the last couple years. As a result, actual decisions will likely be made at the meeting and not prior to the meeting via WhatsApp messaging. Already OPEC is buying more time to reach some consensus by moving the JTC meeting up to Dec 3 from Dec 4.
The reason for the fluid situation is the lack of a trade deal that was supposed to be announced or finalized by the Dec 5 OPEC meeting. The trade pact now seems to be slipping into next year.
As a result, OPEC once again has to address two factors: physical supply/demand and also a bearish trade narrative’s impact on the global economy. If OPEC only had to address one factor, it would be an easier meeting.
In our view, the base case going into the meeting is a 3-month extension that takes the cuts to the June meeting with extra emphasis on greater compliance by laggards Iraq and Nigeria. Many in OPEC will view this as the safe scenario (waiting out a trade deal) but we believe the market will view this as not enough and prices will weaken. So while we put the odds of a 3-month extension currently at 70 percent, it is in a precarious position and likely falling every day as the realization of weaker prices becomes more apparent.
The Saudis are looking for a bullish outcome or at a minimum preventing a decision that sends prices falling - in light of the Aramco IPO pricing on the same day as the OPEC meeting.
Therefore, in our view, the Saudis have not given up on deeper cuts along the same 3-month extension timeline if not longer. We believe the deeper cuts would revert to the previous OPEC+ deal of 1.8 million barrels per day (b/d) vs. the current 1.2 million b/d cuts. This scenario would presumably put Saudi production at a 10.06 million b/d allocation - an additional cut of 300,000 b/d from the allocation under the 1.2 million b/d deal. Saudi actual production will likely still remain below 10 million b/d but deeper cuts would lower the allocation ceiling. We think this would surely be a surprise development at the meeting since most observers are dismissing deeper cuts. It's a long shot but we give it better odds at 40 percent.
Absent deeper cuts, we believe the Saudis will push for a longer extension until the end of 2020 and will insert the standard "review of the deal & market conditions" language (favored by Russia) at the June meeting. Currently we give it 50/50 odds but the chances are rising every day.
Lastly, there are some pushing the notion that OPEC does nothing and punts a decision on extending cuts to a special meeting in March when the current agreement expires. We think this is highly unlikely due alone to the almost certain price slide that would happen but also because most ministers don’t want to go through another special meeting if not necessary.
The Iranian Foreign Minister’s presence in Vienna for the IAEA meeting while OPEC meets is likely to create more headlines about US oil sanctions and the Iran nuclear deal. There is an emerging bearish oil market narrative that sees Iranian oil coming back into the market in 2020 on the belief that Trump will be desperate to sign some deal next year or Secretary Pompeo’s potential departure to run for Senate will leave the administration without any Iran hawks.
We don’t give this concept much credibility. Trump would welcome a deal but it will require concessions from Iran that it has not been willing to do. It’s a huge mistake to assume Trump wants a deal for deal’s sake on Iran. If anything, we see the window for such negotiation closing when Trump enters his reelection year. Whatever you think of President Trump, his administration has been remarkably consistent on Iran policy. As a result, we believe it is an unlikely scenario for significant Iranian oil exports returning to global markets in 2020.
