OPEC supply cut extension likely, but with conditions

OPEC supply cut
Participants in the OPEC supply cut will meet this week to discuss prolonging the agreement to the end of 2018. Reuters photo by Ramzi Boudina.

OPEC supply cut could run throughout 2018

Reuters reports that OPEC and Russia are likely to extend the OPEC supply cut agreement for all of 2018, but there may be a provision that allows participants to review the deal in June.

OPEC sources told Reuters that a recommendation to extend the agreement was made by a joint committee of OPEC and non-OPEC pact participants, but has yet to be approved by ministers from the committee.

The ministers meet to go over the plan on Wednesday while all of OPEC meets on Thursday when they will discuss the deal.

“It will not be an easy meeting and we always look at various scenarios,” United Arab Emirates Energy Minister Suhail bin Mohammed al-Mazroui told Reuters in Dubai.

Following the report, oil prices dipped on Tuesday on concerns that the market may see that with the review in June, the extension of the output cuts to be just three months instead of a full year.

Participants are also considering other factors.  Saudi Arabia is hoping oil will trade at about $60/barrel to sweeten the Aramco IPO and fight the kingdom’s large fiscal deficit.

As well, Russia would like to see higher oil prices as they move towards a presidential election in 2018, however, officials are concerned that a large increase in prices could boost the rouble and kneecap the competitiveness of the Russian economy.

After the committee meeting, one OPEC source told Reuters “Russia is on board for the extension”.

Goldman Sachs said in a note that the outcome of the OPEC meeting is still uncertain because Brent is now priced at over $63/barrel.

“The push for a nine-month extension, four months before the cuts end and given an accelerating rebalancing further stands in the face of prior comments that the cuts should remain data-dependent to assess their effectiveness,” the U.S. bank wrote.

Citi argues that the agreement to cut production will end sooner rather than later.

“OPEC and Russia will both realize they are losing market share and they will be better off going back to a more competitive environment,” Ed Morse, the head of commodity research at Citi, told Reuters.

Goldman Sachs says it expects to see oil prices fall further throughout the week because the market had already priced in the nine-month extension.