Saudi and Russia Disagreement Will Result in "Fudged" OPEC Summit: PVM

Friday November 30, 2018

That the Organization of the Petroleum Exporting Countries (OPEC) received an official advisory to cut production doesn't necessarily mean cutbacks will take place after the cartel meets in Vienna next month; in fact, experts portray the impending summit as "the toughest test yet" for key parties.

The recommendation to cut came from OPEC's Economic Commission Board, which told ministers they need to trim output by 1.3 million barrels per day (bpd) from the October 2018 level to bring supply and demand into balance next year, according to a delegate.

OPEC pumped 32.9 million bpd in October, as Saudi Arabia boosted production sharply compared with 32.3 million bpd in January.

While presumably the advisory board's recommendation buoyed analysts who are optimistic about the cartel slashing production, Stephen Brennock, oil analyst at PVM Oil Associates, stated in a research note published Friday that Russia and the Saudis differ on the need for cuts, and this leaves the kingdom and allied non-OPEC producer facing its "toughest test yet" to find a compromise.

Peter Kiernan, lead energy analyst at the Economist Intelligence Unit, added, "OPEC is grappling over how to manage the expected weaker fundamentals in the oil market next year, yet the uncertainty about what the group will do at its meeting next week is causing markets to be more anxious.

"Saudi Arabia sees the need to cut output, but it wants co-operation from other OPEC members and Russia to do so, while also avoiding any conflict with [U.S. president Donald Trump] over the direction of oil prices."

Brennock went on to predict that "Against this backdrop, the most likely outcome of next week's OPEC meeting is a fudge: Russia and Saudi Arabia will agree to curb production, but by less than is needed to prevent a supply imbalance in early 2019.

"Christmas is unlikely to come early for beleaguered oil bulls."

As if to validate Brennock's outlook, Alexander Novak, energy minister for Russia, stated in an interview with TASS published Friday that producers and consumers were comfortable with current oil prices.

He also said Russia planned to maintain average October oil output level until year-end, and that the Russian oil companies agreed to change oil output levels in 2019 if needed.

Arguably the most optimistic analytical body that thinks crude is set for a price rebound due to diverse parties agreeing to work together is Goldman Sachs: it recently went on record as stating that the G-20 summit may well end in not only an improvement in the U.S.-China relationship but also give greater clarity on the type of production cut OPEC will enact.