‘If needed’ is a phrase to avoid
Although the ministerial meeting to determine the future of the deal is three weeks away, it seems that the oil market has already determined its outcome, or at least is pushing for a certain outcome.
Brent oil prices are trading above $60, and that is because the market has already factored-in the decision to extend the deal based on the recent comments of Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, who said on Oct. 29 that his country is ready to extend the agreement when it expires in March 2018.
The oil ministers in Russia and other OPEC countries such as the UAE and Kuwait, however, have been sending mixed signals last week and the term “if needed” was still a precondition for taking a decision.
It’s very dangerous for the market to see that after OPEC and Russian officials built high expectations for an extension of the agreement, some are now trying to downplay them.
What many OPEC officials are fearing is a repeat of the scenario that happened in the last meeting in May when most ministers announced the outcome of the meeting weeks ahead of it.
Back then, the market had already factored-in the decision and traders were waiting for more than just an extension on the day of the meeting: They were waiting for deeper cuts. So when the meeting ended with no deeper cuts, prices fell.
Now, a similar situation is building and the only difference is that the market is expecting an extension to the end of 2018 and a clear exit strategy from the deal. These expectations didn’t come out of the blue.
First, Russia was the first to hint about the possibility of extending the deal until the end of next year. Then some OPEC officials supported an extension to the end of 2018, including Iranian oil minister Bijan Zanganeh.
Second, the math supports the extension to the end of next year as the oil inventories’ overhang of around 160 million barrels needs more time to clear. Also, OPEC’s own calculations show that rebalancing of the oil market won’t happen until the third quarter of next year, according to a recent report by Bloomberg.
Third, unnamed Gulf OPEC sources have been telling newswires that the likely outcome of the meeting is to extend until the end of next year.
Now, the motives behind the sour-
ces’ comments are not clear and maybe some are trying to push crude prices up by telling the market in advance what they should expect from the meeting.
So after all these signs, the market is building its decisions around an extension. But what many of those in OPEC are missing is that focusing on raising prices before the meeting is not a good strategy if they do not have a detailed plan of what will happen after the deal is over.
What many people were overlooking was comments that came out on the same day (Oct. 24) and pushed crude prices up. The first comments were made by Saudi energy minister Khalid Al-Falih who told reporters in Riyadh that OPEC will make sure there will be a soft landing for the deal after it expires.
The second comments were made by unnamed OPEC officials who told Bloomberg that the group was drafting an exit plan that will be considered by ministers on Nov. 30.
This is when oil prices edged higher strongly and went near $60. Over the next few days, the Saudi crown prince announced publicly that he was supporting an extension of the agreement and this pushed Brent above $60.
Apparently, all the unknowns were factored-in last week and that helped fundamentals supporting prices at around $60. Brent oil prices jumped again and they hovered around $65 on Nov. 6.
Due to the recent hikes, the expectations of OPEC officials went up and they are now trying to keep oil prices above $60 to help fiscal budgets of many states that would need more than $60 next year to break even, based on International Monetary Fund estimates.
OPEC, nevertheless, must keep in mind that any increase above $60 is not supported by fundamentals and prices at these levels are supported by other factors such as geopolitics and a dim outlook for shale oil growth next year.
If OPEC really wants to see oil prices supported at $60 at the next meeting, they need to stop playing games with the market and stop saying “if needed” as everyone knows an extension is badly needed.
They need to hold course and focus on executing the deal with higher compliance possible and they need to assure the market that once the deal is expired (no matter when) that producers won’t open the tabs and flood it.
That’s what the next meeting should be about.
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
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