EMEA News
New Analytical Thought Now Pegs OPEC Cutbacks Lasting into 2019
The question of whether or not the Organization of the Petroleum Exporting Countries (OPEC) and its allies are preparing to make an exit from its crude cutback strategy was again a topic of debate on Wednesday, but this time with a twist: analysts are convinced an exit is in the works, but that it will play out through 2018 and 2019 instead of terminating in the middle of this year.
Robin Mills, chief executive officer of Qamar Energy, told Bloomberg that "Keeping some level of production cuts into 2019 is the kind of thing that makes sense; just abandoning the deal at the end of 2018 would put a lot of oil back on the market."
Mills' remarks came in the wake of Khalid al-Falih, energy minister for Saudi Arabia, telling CNBC once more that cooperation between OPEC and non-OPEC producers should continue in some form past the end of this year.
Alexander Novak, energy minister for Russia, said he "fully agreed" with Falih, and when asked whether something longer-term was happening between the two nations, he replied, "I have the same feelings and they are based on the fact that firstly we have fairly frequent and positive contact at the highest level."
Although Russia and the Saudis were at odd throughout the cold war, the former last October welcomed the kingdom's King Salmon to Moscow - the first ever state visit to Russia by a reigning Saudi monarch, and widely viewed as a harbinger of closer economic and political ties between the two oil giants.
Of course, if the perceived commitment to maintain the cuts and then enact a subtle and slow exit proves true, it is likely motivated by the notion that despite what OPEC boosters claimed throughout 2017, the crude market is not yet balanced.
This was suggested by Falih, who told reporters in Davos that "I'm still anxious about the fragility of the market ... by and large we think we're on our way, but we're not there yet."
But while Falih and Novak seem to be inclined to be motivated by fundamentals, OPEC continues to churn out feel-good rhetoric: the OPEC/Non-OPEC Joint Ministerial Monitoring Committee in a recent meeting announced that "for the month of December 2017, following continuous months of excellent performances, OPEC and participating non-OPEC countries have achieved a record-breaking conformity level of 129 percent with their voluntary production adjustments.
"The monthly average conformity level for the first year of the Declaration of Cooperation was a remarkable 107 percent."
Self-congratulations aside, Olivier Jakob, managing director at Petromatrix GmbH, agrees with Mills that the crude cuts are here to stay for at least 2018: "We are at price levels where we can see an impact on demand and we have the risk of more shale coming" from rival producers in the U.S.
"That raises the likelihood the cuts would have to go on longer."
Previously, the standard analytical line of thought was that OPEC would pull out of its cutbacks prematurely due to escalating crude prices that in turn are inspiring increases in U.S. shale production: Harry Tchilinguirian, head of commodity strategy for BNP Parabas SA, last week said "the probability is growing" that a termination will occur before the end of this year.
