VIENNA, AUSTRIA, December 2, 2019 - Hedgeye’s Senior Energy Policy Analyst Joe McMonigle in Vienna this week for the OPEC+ December 5 and 6 Meetings is publishing daily “OPEC Notes” for clients in addition to his longer more in-depth client notes. Today’s edition of OPEC Notes is below.
Russia Do Nothing Approach Highly Unlikely Option
Oil’s black Friday nose dive in prices resulted from headlines that Russia’s preferred approach would be for OPEC+ to take no action this week to extend cuts after the deal expires in March. Russia was reportedly seeking a special OPEC meeting in March to reassess market conditions and make a decision on extending cuts at that time. We see this as a very low probability approach at almost zero chance of happening. We addressed this in our client note last Wednesday: “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.” In our view, Saudi Arabia would view a do-nothing approach as a disaster for prices and market management and indeed shot down the idea over the weekend in Sunday’s Wall Street Journal article.
Saudi Flood Market With Higher Production to Quota Low Probability Option
More headline risk over the weekend with a Bloomberg article suggesting the Saudis were fed up with compliance laggards under the cut deal and would issue an ultimatum: start complying or Saudis will hike production 300,000 barrels per day (b/d) to its agreed quota. For most of the year Saudi Arabia has produced at about 9.8 million b/d - much lower than its agreed quota under the deal of 10.3 million b/d. The article suggests new Saudi oil minister Prince Abdulaziz would deliver some tough love to OPEC+ members not complying under the agreement and use the threat of a Saudi production hike as leverage. It’s not surprising that Saudia Arabia is frustrated that it must shoulder the burden for the cut deal and those not complying. But while it might be a Saudi moral victory to hike production to punish cheaters, it goes against its priorities in the oil market to put a floor under prices and attempt to push prices higher. We see this as a very low probability option – it’s possible but highly unlikely and goes against Saudi Arabia’s own interest at a critical time when the Aramco IPO gets priced later this week.
Longer Cut Extension Emerging as Base Case
Last week’s base case going into the meeting was 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 insufficient and prices may weaken. So we think a 3-month extension base case scenario is in a precarious position and losing steam as the realization of weaker prices becomes more apparent.
We believe Saudi Arabia and others will push for a longer extension until the end of 2020 and will insert the standard "review of the deal and market conditions" language (favored by Russia) at the next June meeting. We see a longer cut extension as an emerging base case and the favored course of action.
OPEC in Prevent Defense But Don’t Dismiss Deeper Route
Saudi Arabia and some other producers are looking for a bullish outcome or at a minimum preventing a decision that sends prices falling. Therefore, in our view, we see some potential for a surprise decision of deeper cuts – a scenario that may revert to the previous OPEC+ deal of 1.8 million barrels per day (b/d) vs. the current 1.2 million b/d cuts. It's a long shot but we give it better odds at 40 percent. Since our note forecasting a deeper cut scenario last week, several news reports today suggest that deeper cuts have been discussed on a minsters conference call over the weekend.
