Big Decision Ahead for OPEC and Its Allies

As it does every November, OPEC is convening once again in Vienna. In the past, such meetings have been more prosaic affairs, but of late, they have taken utmost significance. The current OPEC supply freeze deal (brokered together with Russia and several other important Non-OPEC countries) was formally detailed at last year’s meeting. The main question at this year’s meeting is: will OPEC extend the cuts beyond their current March 2018 end-date?

All signs point to yes. A draft agenda published for the November 30 meeting allocates three hours for discussion on the matter. Last year’s discussions reportedly stretched into the wee hours of the morning. That is a good indication that things are expected to proceed smoothly, if they haven’t already been locked in already. This is despite geopolitical tensions between several Middle Eastern OPEC countries, lining up into a pro-Saudi Arabia and pro-Iran block. Language by various OPEC oil ministers over the past two weeks indicate support for continuing the freeze, viewing it even as necessary. Oddly, Saudi Arabia has been the cagiest so far, but this may be posturing to make more of an impact.

The wider oil industry expects thinks an extension is guaranteed. They would seem to be right. What is likeliest to happen is that the current supply freeze gets extended by 9 months to December 31, 2018. The existing supply quotas will be maintained, but not deepened. It is likely to Libya and Nigeria will have to agree to some cuts, given that they were exempt from the last round. The market will view this as enough to maintain crude prices at a floor of US$60/b; breaking beyond this range would require deeper concession than OPEC is willing to do, out of the question if you follow its language so far. So good, but not great. Given the length of the oil downturn, however, that’s not a bad position to be in.

Winners & Losers of an OPEC extension for another 9 months

Winners

• Upstream oil operators: Sustaining the current US$60/b oil is better than what the industry was expecting based on previous projections of circa US$50/b earlier this year
• OPEC and NOPEC. Proving once again that it still holds significant clout while also helping its member states sustain their economic programs
• Unconventional oil. If crude prices can sustain their levels above US$60/b, it may just bring assets like Canadian oil sands back in play?
• US shale production. Support for higher prices will spur if not sustain output growth in the US, already at record highs
• Oil bulls. However, a mere extension will not be enough to lift prices above US$70/b
• Upstream service, infrastructure and technology companies. While stable crude prices may encourage investment for projects, it won’t be at high enough levels
• Oil company employees and jobs. Increased job security for oil employees, and openings for new work opportunities for new industry entrants or those keen to re-enter the industry again. (forget fat bonuses though!)

Losers

• Libya and Nigeria. Exempt previously due to internal conflict, they should be subject this time
• OPEC market share. As major refiners looks elsewhere, especially the in US for cheaper supply
• Downstream refining. The current healthy margin enjoyed maybe slightly squeezed
• Oil bears. If the extension does go ahead, it will set a stable floor of US$60/b for Brent
• Gasoline prices. Expect to pay more at the petrol station as higher retail prices set in
• Consumer Inflation. As steady higher crude prices feed into the wider economy
• Long term demand. Higher oil prices may also impact the overall demand for oil, removing its cost competitiveness from other energy sources
• Emissions. Sustained oil production and on-going consumption may contribute further to the carbon emissions debate

Easwaran Kanason

Before it's here, it's on the NrgEdge mobile app!

Subscribe to NrgEdge for daily updates on energy news and analysis. Signing-up is a breeze with your existing Linkedin or Facebook login credentials.