Hopes are running high ahead of Thursday’s OPEC meeting that members will agree to further cuts to output in a bid to maintain price stability. But with crude rallying firmly before the meeting, will it be a case of buy the rumour, sell the fact?

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Production curbs

 

OPEC members convene in Vienna for the semi-annual meeting with all attention on whether they will agree with Russia and other non-members to extend production curbs.

Late last year OPEC, along with 11 non-members, agreed to reduce monthly output to draw

First of all, there seems a strong chance we will get an agreement to extend. Saudi energy minister Khalid al-Falih and Russia’s Alexander Novak have both voiced support for prolonging cuts, saying their countries will do whatever is necessary. They would like to curb production for another nine months, but there are some doubts about whether all members want to agree anything beyond six months.

However, Iraq, OPEC’s second-largest producer and a potential sticking point, has swung behind the Saudi-Russia position and backed a nine-month cut, making this now very much the base case for the outcome from the meeting.

High hopes

 

Will an extension be enough? OPEC seems to be fighting a losing battle and it may take more than a Draghi-like ‘whatever it takes’ comment from the cartel to really shore up prices – they will need to actually show they are prepared to do whatever is required.

At present oil producing nations are carrying out fairly modest reductions in output compared to what the Saudis have previously done by themselves. It’s pretty evident that Saudi Arabia in particular no longer wants to be the key swing producer.

OPEC might do better to cut deeper for less time than tinker at the edges for longer.

With the 9-month extension now pretty much expected, it’s probably going to take a surprise to see oil rally much higher than it already has.

However there is a chance that beyond extending the cuts, members will agree to deepen them as well, perhaps to as much as 2.5m b/d from the current 1.8m b/d.

The total OPEC output of 32.5m could be lowered or Libya and Nigeria could be asked to contribute to the reduction by removing their exemptions. Getting agreement on how to share out deeper cuts will be tricky but not impossible.  

Shale

 

OPEC’s curbs have been a success, at least in terms of compliance from member states who have not had a great record on this front in the past. But the intent of the curbs – to force up prices and squeeze US shale drillers – is not working.

Shale producers are doing just fine at $50 a barrel and now OPEC thinks production in the US will rise by 820,000 b/d this year, compared with a forecast six months ago that it would contract by about 150,000 b/d.

Aramco IPO

 

In the background to the meeting and any production curbs is the imminent IPO of Saudi Aramco. The Saudis need to ensure prices remain high enough for the country to get the most from the listing.

That perhaps explains the desire for a nine-month extension rather than just six, as it would ensure the curbs remain in place until March 2018, with the Aramco IPO expected early next year.

 

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