To cut or not to cut?
AS expected, the Organisation of Petroleum Exporting Countries (OPEC) has greed to extend oil output cuts on November 30 until the end of 2018.
However, the length is less important than the quota level.
Whether or not the countries extend and the duration of the deal are not the relevant questions, in our view.
We believe the level of the cut is what really matters, and we assign a low likelihood to this detail being announced on November 30.
The OPEC/Non-OPEC Declaration of Cooperation (DC) was always meant to be flexible.
The Joint Technical Committee and Joint Ministerial Monitoring Committee can suggest changes at any time.
Even if the deal ‘ends,’ we would not expect an onslaught of new production from DC participants.
On November 30, member countries are unlikely to provide clarity on production levels in 2018, leaving the market to presume that the cuts will remain intact.
That would be a misguided assumption in our view.
We do not expect these levels to remain static during 2018.
However, market-management mode should remain the theme for the foreseeable future.
The alternative (lower prices) should keep all countries in support.
Significant swing potential revolves around the flexible four countries which are: Saudi Arabia, Russia, the United Arab Emirates (UAE), and Kuwait.
We believe that other participants will not likely veer from their current output trajectories.
The key is understanding what motivates the flexible four.
The sustainability of the deal depends on how much longer they are willing to sacrifice market share in the pursuit of revenue and market stability.
Oil diplomacy should prevail over renewed geopolitical tensions, reducing the likelihood of a repeat of the failed Doha agreement in April 2016.
Large financing needs in the Kingdom of Saudi Arabia, along with protracted fiscal consolidation and recent political reshuffling, will increase the near-term focus on oil price stability.
Russia will also remain supportive since economic vulnerabilities have not gone away and a presidential election is scheduled for March 2018.
This week, we expect volatile prices as market participants shed length. Prices might fall in the immediate aftermath of the deal as speculative length ‘sells the news’.
Still, fundamentals should keep WTI should hover above US$52 per barrel.