Markets & Policies

Opec Output Deal 2.0 – The Vague Deal

"opec deal 2018"Yesterday the 24 oil producing countries forming the OPEC+ group met in Vienna on the occasion of the 174th Opec meeting to decide whether to increase oil output.
The meeting – that occurred among great expectations – ended with the unanimous decisions of participants to increase oil production starting from 1 July 2018.
The anticipated target was 1 mb/d to be added to current output levels, and U.S. President Trump did not fail to stress that a significant change was expected, by tweeting “Hope OPEC will increase output substantially. Need to keep prices down!”.

Among general tensions, and the opposition of some Opec members to an increase in production – Iran first of all – Opec reached a compromise by agreeing on an output increase without pointing out a number.

OPEC+, starting from the fact that in May compliance level with the deal of November 2016 reached 152%, agreed to bring it down to 100%.
The increase, that is lower than expected by many analysts, will mostly offset output decrease by Venezuela, already lowered by 1mb/d since 2016.
In numbers, it means that actual additional production will be of around 700.000 b/d.

A Vague Deal to Preserve Unity

The deal is quite vague, since it did not assign specific quotas to producers; in other words, it does not say who is going to increase its output and by how much. What will happen is that countries with spare capacity (Saudi Arabia, Russia, Kuwait, UAE and Oman) will boost production to fill the gaps left by others, with Saudi Arabia and Russia very likely to carry the lion’s share.
Many other producers are not in the position of increasing output (Mexico, Venezuela, South Sudan, Angola), partially explaining why the agreed increase is not higher than it is.

Among the countries navigating uncertain waters there is Iran, that was the most stubborn opposer to an increase. After the failure of Russia to convince Teheran, a closed-door meeting with Saudi Arabia managed to bring some agreement. Iran has ceded to mounting pressures, as it is possible that it will give up some of its market share to other producers if the unilateral sanctions imposed by the U.S. manage to affect its ability to increase production, or even to keep it stable.

To reach consensus the deal maintained the unity that allowed the OPEC+ group to deliver good results by eroding the oil glut and restoring price stability since November 2016.

Reaction of the market

Oil prices increased, with Brent slightly above $75 a barrel and WTI above $68. This signals that markets had expectations of an higher increase by Opec and welcomed the outcome of the meeting for its potentially stabilizing effect.
The desiderata of Opec producers is to maintain Brent at a price between $65 and $70 a barrel maximum, to ensure sustainable revenues for producers, keep consumers’ anxieties at bay, and avoid boosting too much competition.

As declared by Joe McMonigle, senior energy analyst at Hedgeye Risk Management LLC “The lack of specificity is bullish for prices…It’s a mystery oil production increase because we don’t really know the final numbers”.

The next months will be decisive to see how oil producers will behave and how markets will react in the longer term.

Next Opec meeting: 3rd December 2018.

To be continued…