OPEC Unlikely to Announce Prolonged Cutback Extension Later This Month: Citigroup

Many factors, including growing demand in China, may prompt OPEC to rethink its strategy. File Image / Pixabay

Get set for disappointment later this month: that's the message from Ed Morse, head of commodities research at Citigroup, who believes the Organization of the Petroleum Exporting Countries (OPEC) will not announce a full extension of its production cutback agreement in Vienna on the 30th  as many are hoping - and that its actions will not significantly tighten the market next year anyway.

Instead, Morse says OPEC will maintain its cutbacks in a sequence of decisions rather than a single commitment; as for his negative view about the deal's efficacy, he reiterated the argument that was up until recently prevalent within analytical circles that U.S. shale production will surge again due to current high prices, plus there has been "an incredible amount of hedging activity by U.S. producers" for 2018 and 2019 that allows them to resume drilling,

It's no secret that Russia and many OPEC members are looking to expand rather than contract production next year, and another factor that may cause the cartel to make a surprise announcement in Vienna is China: that country's Ministry of Commerce has raised the quota for use of overseas oil by non-state companies in 2018 by 63 percent or 1.1 million barrels per day (bpd) versus the prior year.

"China will remain the strongest demand driver for the world's oil industry for the next couple of years," said Li Li, head of research at ICIS China. "Total imports by Chinese state-owned and private refiners and traders will increase remarkably with the expansion of existing capacity and starting-up of new plants."

This is despite data from China's General Administration of Customs showing crude imports in October retreated from near-record levels to the lowest in a year.

But it remains to be seen if China and growth in other nations will mitigate the effect of production juggernaut U.S. shale and sway OPEC's trajectory: Bloomberg notes that daily production averaged 9.62 million barrels last week, the highest since the federal government began tracking the data in that format in the early 1980s.

Another scenario that may emerge from Vienna is that OPEC does as everyone expects: Martin Rats, analyst for Morgan Stanley, said, "Oil demand continues to grow, OPEC output stays restrained, and there is little growth elsewhere; this raises the world's reliance on shale."

Earlier this week Morgan Stanley stated that rapid growth in demand plus OPEC extending its cuts would oblige the U.S. to grow production from about 5.9 million bpd this year to 7 million bpd in 2018.