Oil prices crashed early Thursday, as OPEC failed to reveal a solid agreement in Vienna, at least not yet. After hours of meetings, OPEC cancelled its news conference, awaiting the Russian delegation set to arrive on Friday.
The oil price crash offers the group a reminder that the market is banking on a sizable cut.
OPEC met on Thursday and Russia’s oil minister Alexander Novak arrives on Friday, where he can essentially tell Saudi Arabia what to do. The rest of OPEC, save for the UAE and Kuwait, are either unable or unwilling to go along with production cuts.
Saudi Arabia clearly wants to reduce oil output to balance the market, and it will have to do the lion’s share of cutting. Russia is much less concerned about a specific outcome, and has only expressed interest in a symbolic cut. That gives Moscow an extraordinary amount of leverage at the OPEC+ meeting.
Early Thursday, Al-Falih struck a confident tone in the face of uncertainty, suggesting that Saudi Arabia is not desperate for a deal, which is likely a bit of bravado in an attempt to put pressure on the rest of the group. “If everybody is not willing to join and contribute equally, we will wait until they are,” he told reporters. Brent fell below $60 per barrel during midday trading.
President Trump offered his two cents on Wednesday on the eve of the meeting.
Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!
— Donald J. Trump (@realDonaldTrump) December 5, 2018
In reality, Saudi Arabia is pushing hard for a deal. After several hours of closed door meetings, the OPEC delegates emerged without offering too much in the way of detail. Still, there were rumors swirling in Vienna (as is usual) that the group is zeroing in on a production cut of about 1 million barrels per day (mb/d). But the lack of an announcement on Thursday unnerved market traders.
Nevertheless, there really isn’t a wide set of possible outcomes. Most analysts seem to think that the OPEC+ meeting will end with a production cut that lies in a relatively narrow range. According to S&P Global Platts, the group is considering options between 500,000 bpd and 1.5 mb/d.
Al-Falih also told reporters that a cut of roughly 1 mb/d should be enough to balance the market. Bloomberg reported on Thursday that “a consensus was emerging” around a cut of that size, including Russia’s contribution. “We want to come up with something that will balance the market but we don't want to shock the market,” Falih told reporters in Vienna.
Oil traders likely already baked in that amount as a baseline, so if OPEC+ reduces only by that amount, the markets probably won’t be overly impressed.
In fact, anything less would be viewed as a major disappointment. The markets are already pricing in 1 mb/d and hoping for more. “As ministers gather… the general belief is that some kind of cut will be agreed–anywhere between 1 and 1.5 million barrels a day,” said Tamas Varga, oil analyst at PVM brokerage, according to the Wall Street Journal.
The sticking point seems to be how much Russia will cut. If Russia cuts by around 150,000 bpd, as Moscow prefers, then the overall cut would be closer to the 1 mb/d range. If Russia cuts by 250,000 to 300,000 bpd, for which Saudi Arabia is asking, then the total cut could rise to 1.3 mb/d, according to Reuters. “The cut will be between 1.0 and 1.3 million bpd. We just have to see how it will be distributed,” an OPEC delegate said. Iran, Libya and Venezuelan want exemptions from the cuts, and it isn’t clear if the group resolved this disagreement.
The larger amount “would be enough to rebalance the oil market next year – i.e. to avoid an oversupply,” Commerzbank said in a note on Thursday. “In this case Brent would rise slightly, though it would fall to below $60 if production is cut by a lesser amount.”
Rystad Energy went even further. “To surprise the market in a bullish fashion, we believe cuts approaching 2 million bpd would have to be announced. Should OPEC+ announce a 1.5 million bpd cut, we believe the market reaction would be neutral at first, but gradually pave the way for a recovery in oil prices above the $70 level for Brent in 2019,” Bjornar Tonhaugen, head of oil market research at Rystad Energy, said in a statement. “[A]nything less than 1 million bpd of 2019 supply would be interpreted negatively by the market.”
By Nick Cunningham of Oilprice.com
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