OPEC-/NOPEC-Deal 3.0 – “The packaging is more tantalising than the content”!

Within the framework of yesterday’s meeting in Vienna, the 24 representatives of the OPEC/NOPEC coalition agreed to extend their production cuts up to the end of 2018. The reduction will constitute 1.72 million barrels/day. OPEC member states Libya and Nigeria, which had been previously exempted from the agreement, have accepted loosely formulated production ceilings. The parties also agreed to review the situation in June 2018. No official statement was made on a planned exit strategy.

Overall, the market reacted positively to the new “crude oil news flow”. The Brent January future climbed to USD 63.50, as investors welcomed the unusual solidarity of the cartel – especially given the recent tension between Saudi Arabia and Iran concerning foreign policy. The rhetorical emphasis of the Vienna roundtable clearly struck the right note with investors.

At first glance, the OPEC/NOPEC coalition at least gave the market what it was expecting. However, we believe the pre-Christmas crude oil present from Austria is representative of the Christmas presents that will soon lie under the tree, where “the packaging is more tantalising than the content”!

Although the market currently seems to believe it has been handed a reliable OPEC/NOPEC schedule for the whole of 2018, we feel it is underestimating the significance of the June review that was also agreed in Vienna. If this review date is not only endorsed as a pure “rubber-stamping exercise”, the route of OPEC/NOPEC production cuts can only be mapped up to the next summit in Vienna on June 22nd.

Against the background of the market participants’ expectations, the production-cutting partners were fully aware that (a) the “package of solutions” they presented, (b) the level of partner consensus presented to the market and (c) their reference to the short- to medium-term price path will have a decisive influence on the diverse crude oil prices. They are quite accepting of the fact that the positive correlation between the WTI price and US shale oil momentum will have extreme “production-motivating” consequences in the US shale oil regions. The fear of the magnitude of such a response by US production has clearly eased somewhat recently. However, we feel the predictions in this respect could be miscalculated ever so slightly. WTI prices of USD 45-50 certainly do not offer the US infinite production flexibility. A knowledge of higher maths is not needed to see that the US shale oil companies will produce significantly more crude oil at WTI prices of USD 55-60 than at USD 50.

The OPEC/NOPEC club’s review date in June is likely to be interesting. Firstly, because higher US production will have probably become apparent by then and secondly, because Russia as one of the cartel’s key players (NOPEC) will have lost some additional motivation after a successful presidential election in mid-March 2018.

 

 

 

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