OPEC Meeting Preview: 5 Things You Need To Watch
OPEC and top nonmembers are widely expected to extend their current output-cut deal at a biannual meeting Thursday, but there are still a few wild cards left as the current deal is set to expire in March.
X Hopes are running high, so any failure to prolong the agreement to remove 1.8 million barrels of oil per day from the market could send oil prices tumbling.
“I think they learned their lesson to not disappoint the market,” said Phil Flynn, a senior market analyst at the Price Futures Group.
While there is broad agreement on the need for an extension, the are other factors to consider. Here are five things to watch.
Length, Depth Of Cuts
Russia is ready to announce an extension on Thursday, but officials want the size of the cuts tied to the strength of the oil market, Bloomberg reported.
While the general consensus seems that the current deal will be extended, Venezuela, which has been rocked by soaring inflation, has pushed for even deeper cuts.
“If prices were weaker they would talk about deeper cuts,” Flynn said. “But I don’t think they are going to need to talk about deeper cuts at this point.”
Brent and U.S. crude prices have surged roughly 40% since June and are now hovering around $63 and $57 a barrel, respectively.
More Countries Joining
In October, Venezuela said it was inviting 10 to 12 countries in South America and Africa to join the deal but didn’t give details. And Uzbekistan could attend the meeting as an observer, Saudi Arabia’s Energy Minister Khalid Al-Falih said earlier this month.
Compliance will also likely be a major topic.
Last month, the International Energy Agency said compliance was at 86%, higher than in the past. But the unstable Kurdish region of Iraq is one of the least compliant regions. Iraq is the second largest OPEC oil producer.
“But if you look at Iran, Iraq, Nigeria and Libya, even though their production has gone up, it hasn’t gone up nearly as much as some people thought it would,” Flynn said.
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The “linchpin” for production deal is Russia’s relationship with Saudi Arabia, said Omar Al-Ubaydli, an affiliated senior research fellow at George Mason University, adding that the Kremlin has sought to forge better ties with Riyadh.
Saudi Arabia also relies on high oil prices to fund its government and needs stronger, stable oil prices to get a strong initial public offering for state-run oil giant Saudi Aramco next year.
“However both Russia and Saudi Arabia have an unpredictable policy in the Middle East at present so the accord is fragile,” Al-Ubaydli warned.
Russia and Saudi Arabia have supported opposite sides of proxy wars in Syria and Yemen, while tensions between Iran and Saudi Arabia are growing. Elsewhere, tensions between Qatar, which restored full diplomatic relations with Iran earlier this year, and Saudi Arabia and other Gulf Cooperation Council countries are at a peak. Sources told Reuters there has been no official contact between the GCC and Qatar.
“As bad as things are between Iran and Saudi Arabia right now, they have an amazing way of separating their oil politics from normal day to day politics,” Flynn noted. “When it comes to oil production they have a common goal of getting prices higher.”
U.S. Shale Still A Threat
Three years after OPEC sparked a price crash to force surging shale producers out of the market, U.S. oil output has recently set record highs, keeping the resilient U.S. energy sector high on OPEC’s agenda.
Andy Hall, an oil trader who closed his hedge fund earlier this year, will speak to the cartel about U.S. shale, according to Bloomberg. A representative from Citigroup (C) and a Schlumberger (SLB) consultant are also scheduled to speak.
The U.S. is set to boost oil and gas production to unprecedented levels by 2025, the IEA said in a report earlier this year month. But OPEC will take back some market power in the long term.
OPEC needs to start thinking about an orderly exit strategy as global oil demand rises, Flynn said.
“Global demand is soaring with a strong economy in the U.S. and Europe, and near record (crude) imports in China,” he said.
But OPEC must navigate uncertainty on that front as well. The IEA cut its demand growth outlook for this year and 2018 by 100,000 barrels per day, to 1.5 million bpd in 2017 and 1.3 million bpd next year, in its monthly oil report.