The Strategist

Waiting for news from Vienna: what will OPEC + decide?

11/30/2017 - 11:50

Today in Vienna, the ministers of OPEC countries and other non-member states will discuss extension of the agreement on the reduction of oil production.

Vincent Eisfeld
Vincent Eisfeld
So far it looks like the agreement is going to be extended. It is not yet clear whether the parties will agree on expanding production cuts, but this is quite possible considering that 10 countries will additionally join the agreement. Earlier, the Monitoring Committee of the transaction recommended extending the agreement. Yet, the talks will continue today, which is underlined by a comment of the oil minister of Kuwait, Essam al-Marzouq, who noted that this is just one of many recommendations.

At the end of 2016, the oil-producing countries agreed to cut production by 1.8 million barrels per day. OPEC countries account for 1.2 million barrels per day from this volume. The OPEC + agreement is valid until March 31, 2018, and it has already been extended in May.

In Vienna, the oil-producing countries have to decide on what terms of the agreement should be renewed. The group is considering options for extending the agreement for six months, nine months or a year.

Now, OPEC + faces the task of keeping prices in the $ 50-60 range stable in order to achieve a market balance, but, at the same time, not to give reasons for increasing shale oil production in the US.

Since the markets are expecting extension of the agreement, rejection of this at the current meeting would lead to a severe drop in prices. However, the countries will still be able to arrange another meeting before the end of the current deal.

The drawback of OPEC's strategy is that not only oil traders are confident in a more balanced oil market: US shale seems to continue to increase production. The number of drilling rigs has been increasing for several weeks, and oil production in the US has is coming close to record highs.

Bloomberg Gadfly writes that the difficulty for OPEC lies in the fact that estimates of the volume of US stocks that will be added next year will be very different.

IEA forecasts an increase in supplies of non-OPEC countries by about 1.4 million barrels per day in 2018, which is a huge volume that can suppress demand. From this point of view, OPEC cuts are extremely necessary to avoid another price collapse. OPEC hopes that the oil shale industry will keep fighting. The cartel predicts that the growth in supplies from non-OPEC countries will be less than 900 thousand barrels per day in the next year.

There are many signs that the oil shale industry will face unexpected problems. But the problem for OPEC is that it simply cannot predict with any accuracy what to expect from shale oil production during the next year.

Nevertheless, the goal of reducing OPEC production is to bring world oil reserves back to the middle levels; this is a goal that will take more time to achieve. Given all this, it would be reasonable to assume that the group will block the extension of the agreement in a few days.

Although some warnings were made by OPEC on the revival of oil shale production, a number of experts warn OPEC that production volumes may be too large. Brent is already on the territory of $ 60 per barrel, and the continuation of cuts could affect the further price increase.

If prices rise to $ 70 per barrel, then demand for oil may decline. But if the reduction in production is not prolonged, it will also be a blow for OPEC and other oil-producing countries.

Another issue is how OPEC plans to exit the deal afterwards, as a mere completion of it will inevitably drop the market.

Avoidance of production limits is likely to be acceptable only if the conditions on the oil market are toughened: stocks at medium levels or a balance of supply and demand, or a small deficit and higher prices.

However, participation of countries such as Turkmenistan, Uzbekistan, Chad, the Republic of the Congo, Ghana, Côte d'Ivoire, Senegal, Egypt, Uganda and Bolivia will make it possible to redistribute the burden, reducing the restrictions for other participants.