OPEC: All about the messaging in Vienna - TDS
According to analysts at TDS, a less than unambiguous commitment to keep supply at low levels is likely in the cards at the forthcoming OPEC meet in Vienna.
“Saudi Arabia, the world’s largest exporter and undisputed leader of OPEC, is already unhappy about bearing a disproportional weight of the cuts and complains that its fellow producers aren't fully complying. Based on the chatter in the media, they also seem to be frustrated with Russia’s reluctance to give a clear commitment to extending the cuts for the rest of 2018. However, Saudi Energy Minister Khalid Al-Falih has said he would like to announce an extension until the end of 2018 next week.”
“In sharp contrast, the Kremlin has been sending mixed signals, in part to appease Russian producers who have spare capacity. But, the Russians are also playing a global tactical game. They are trying to keep crude prices from rising sharply, before demand is strong enough to be able to absorb them. And, that is not until 2019. At this time, poor shale oil company financials, weak capex spending and a backwardated curve have prevented a surge in drilling. In fact, drilling has slumped, which helped the market rebalancing narrative of late.”
“Another reason why Russia may not want to send oil prices surging is related to its goal of economic diversification. Moscow is currently benefiting from a weaker currency relative to pre-oil crash levels, which benefits exporters, and makes the country less dependent on energy as a source of budget funds.”
“It is likely that OPEC/Russia will roll over the current accord, as it is mutually beneficial. However, the tone is likely to be somewhat pragmatic, leaving some ambiguity surrounding the commitment to leave production contained for the balance of 2018.”
“Gearing the size of the curbs to the oil market S&D fundamentals will likely be the prevailing narrative in Vienna. In short, the group will commit to a restricted supply, but they are likely to say that they can turn the spigots on again if the market rebalances. To the bulls, who have driven long exposure to record territory and prices to a two year high, this no doubt will be a disappointment, triggering a modest drop in prices toward support.”
“But, as the market continues to see inventories drain in the face of strong demand and supply control, prices should move higher in early- 2018. As such, we continue to see WTI crude average $61/bbl next year, with Brent trading at $62/bbls for the year.”