There are two weeks left until ministers of OPEC and their non-OPEC counterparts meet in Vienna to discuss the fate of their current agreement to curtail production, yet OPEC’s officials are still talking about surprises.
Kuwait’s OPEC governor Haitham Al-Ghais said in an interview with Argus on Nov. 9 that the ministers have “many options” on their table, including the extension of the agreement, or increasing the level of cuts beyond the current level, or “some other surprises.”
Another source told Arab News that Saudi Energy Minister Khalid Al-Falih is also planning a surprise to the market on the day of the meeting.
Indeed, OPEC is surprising these days. It’s kicking off its series of meetings until November 30 with a conference with technical experts on November 22 to understand better the shale oil world.
They are inviting big names in the industry to present to them about shale oil, including Andy Hall, the famous oil trader who was first to predict in the mid 2000s that oil prices would hit $100. But Hall himself is having difficulties predicting the market next year because of the unclear situation of shale oil producers, and that’s why he closed his oil trading hedge funds this year.
So, the outcome of the forthcoming meeting will be a surprise. Everyone is agreeing so far on extension but the duration and the length of that is still under discussion by ministers and won’t be decided until the day of the meeting.
Moreover, the ministers have still not decided when to announce the decision. Should they wait until the first quarter next year or should they go ahead and announce everything on November 30?
On one hand, the Saudis are pushing for an extension until the end of 2018 and that should be announced on November 30, as Oman oil minister Mohammed Al-Rumhy told Bloomberg in Abu Dhabi last week.
On the other hand, there is the Russian camp that also includes Kuwait, who are seeing that a decision should be made toward the end of the agreement in the first quarter next year. The views of this camp are very evident in the comments of officials from both countries.
It seems, however, that many favor the Saudi view. Also, the majority of OPEC is supporting an extension to the end of 2018, according to official comments from Iran, the UAE and others.
But the outcome is not the only surprise that OPEC and the Saudi oil minister have in mind. There are other surprises that they are considering — mainly, adding more countries to the agreement.
There are three possible reasons behind this. First, adding more producers shows the market that the agreement is well supported by everyone. Second, this will also show that OPEC still matters and that Saudi Arabia has a great leverage when it comes to oil diplomacy.
Third, and most important, if more countries are added that will mean current producers can increase their production next year when demand will pick up and the outlook for non-OPEC supply isn’t worrying.
If more countries are added then the target of 1.8 million barrels per day can be distributed among many, and this will take off some of the burden that producers such as Saudi Arabia faced this year when it had to cut more than it should to compensate for others who have low conformity levels.
What OPEC or Saudi Arabia fail to understand is that there is no more room for surprises. The market has factored in everything in the current price of $60.
Extending the agreement, therefore, is a must and if there is no announcement of the extension on November 30, that is the surprise for the market. The result of that is what we all know: lower oil prices.
Why would anyone let oil prices go below $60? Simply, there are many who can survive very well with oil at $55 to $60 and this includes Russian producers. Lukoil was the first to announce publicly that with oil at $60, the deal has achieved its target and exiting from the deal should be the focus.
Thus, the second surprise for the market is not to have a clear exit strategy on Nov. 30 because this will signal that everyone can flood the market after the agreement ends, and that’s not good for prices.
If OPEC is concerned about oil prices then it has to consider surprising the market with something real and not with marginal steps such as adding small producers. Otherwise, the surprise will be for OPEC to see lower oil prices post-meeting, and that is the surprise that everyone at the group fears.
• 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