OPEC and Russia are expected to extend their oil production deal at least through midyear. However, if they were to cut more output, as some speculate, it would blindside what has become a complacent market, analysts warned.
The ministers will head into the December 5 and 6 meeting with oil prices near their highest levels in two months. OPEC and Russia and other allies have an ongoing agreement to reduce output by 1.2 million barrels a day, with the biggest cuts coming from Saudi Arabia.
“At this stage, it’s not perfect for a number of producers, but it’s not catastrophic either,” said Helima Croft, global head of commodities strategy at RBC. “We’re kind of treading water.”
The current agreement expires in March, but many analysts forecast the OPEC plus group to extend it until its next meeting in June or even to its meeting a year from now.
“It’s a very unsettled time for OPEC. The gulf between the haves and have nots has widened. Price relief has not been enough to stave off social unrest in a number of key producer states. … There’s no better option at this point,” Croft said.” …We’ve had almost like a second Arab spring.”
Croft expects the deal to be extended until June, and then ministers will again review it. Many other analysts expect the cuts will be extended as well, but some believe OPEC and Russia could cut even more.
“A Hollywood shock ending would be if they actually went deeper,” Croft said.
An IPO in waiting
The meeting takes place at a key time for Saudi Arabia, which will be issuing stock in its state-run Saudi Aramco for the first time ever, just as OPEC’s meeting gets underway.
“It wouldn’t surprise me if the Saudis would go for more [production cuts], to tighten the market even more than they have already,” said John Kilduff of Again Capital.
Kilduff said Saudi Arabia may want to make sure oil prices continue to improve, especially in light of the Aramco offering.
Russia’s energy minister Alexander Novak has said he doesn’t favour increasing the size of the cuts, and the Russian position is that members should be forced to abide with the current level of production.
Russia has also been angling to have condensates removed from the deal, meaning it would only to have its actual crude oil production counted, not other petroleum byproducts. If that were to happen, Russia’s share of the cuts would drop since its overall production total would drop.
“The Russian intentions will be a critical aspect of it for the future, especially with them wanting some wiggle room on the condensate and potentially produce more. They’ll be in the deal in name only,” said Kilduff.
There has been speculation that Russia may be unhappy with the production agreement, in part because its energy companies oppose it.
“It’s not so much that Russia is going to storm out of the meeting. As to what may end up happening, may be more wait and see,” said Citigroup energy analyst Eric Lee. He said it’s possible the OPEC plus group could maintain the status quo, hold off on extending the agreement, and call a meeting for right before the March expiration. That would unsettle the market, he said.
“Unless they deliver something quite strong and stick to it, then it’s more likely to have some downside risk,” he said.