Hedgeye’s OPEC Options Score Card Weighs Probability of Current Options on Table

OPEC NOTES: Longer & Deeper Cuts Emerging as Base Case(s) for OPEC Action - zoil

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. Excerpts from 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 and addressed this in last Wednesday’s client note: “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.”

Saudi Hike to Quota to Punish Laggards 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 we will hike production 300,000 barrels per day (b/d) to the agreed quota. For most of the year the Saudis have produced at about 9.8 million b/d - much lower than their agreed quota under the deal of 10.3 million b/d. While it might be a Saudi moral victory to hike production to punish cheaters, it goes against its own interest on supporting prices at a critical time when the Aramco IPO gets priced December 5.

Longer Cut Extension Emerging as Base Case

We think a 3-month cut extension to the June meeting is in a precarious position. 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. Instead we see a push for a longer extension until the end of 2020 and with 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

OPEC wants to make sure its action is in line with keeping a floor on prices – a prevent defense for oil prices. But don’t dismiss a surprise decision of deeper cuts – a scenario that may revert as high as 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 last week forecasting a deeper cut scenario, several news reports today suggest that deeper cuts have been discussed on a minsters conference call over the weekend with a deeper cut of about 400,000 b/d.

OPEC NOTES: Longer & Deeper Cuts Emerging as Base Case(s) for OPEC Action - z OPEC Options Score Card