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Will The OPEC Meeting Yield A Bullish Surprise?

Nick Cunningham

Oil prices fell sharply on Friday on rumors that OPEC would decline to deepen the production cuts, but the rumor mill continues to churn.

Over the weekend, Iraq’s oil minister said that the group would indeed consider deeper production cuts. An additional reduction of around 400,000 barrels per day is on the table, according to Iraqi oil minister Thamir Ghadhban. “This figure has been discussed and reached between OPEC ministers as a result of careful studies,” he said.

“There are viewpoints for OPEC+ to do further cuts, but not as big as 1.2 million barrels a day,” Ghadhban added, according to Bloomberg. “Such cuts will lead to market stability, maintain shipments to consumers.”

That assertion flies in the face of other statements from OPEC ministers, who have largely signaled a willingness to extend the current production cut agreement – set to expire in March 2020 – through the end of next year, but not to deepen them.

The twice-per-year OPEC meetings in Vienna have historically been preceded by rumors and furtive efforts (often by unnamed officials) to change market sentiment or to apply pressure on rival ministers through leaks to the media.  The upcoming meeting appears to be no different.

But it’s not clear how seriously to take the statements from Iraq’s oil minister, who hails from a country that routinely flouted its production limits. Bloomberg surveyed 35 oil market analysts and only one thought that a deeper production cut was likely.

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OPEC+ faces a confusing set of variables as it meets in Vienna. The global economy has slowed, depressing demand growth. Supply forecasts are calling for a rather sizable glut in 2020 if OPEC+ does not extend the cuts, and arguably even if it does.

However, these forecasts are predicated on yet another year of massive production increases from U.S. shale, a bet that is far from assured. Available credit has disappeared for smaller indebted shale drillers. The entire industry aside from the oil majors has promised to slow the pace of drilling.

All of that is to say that OPEC+’s task might not be as daunting as the IEA and others predict. That’s not to say that the oil market is tight, but simply that another year of U.S. shale production increases of around 1 million barrels per day is looking increasingly unlikely. IHS Markit recently said that the supply growth could be as low as 440,000 bpd – still substantial, but a far cry from the 0.9 mb/d or so that the IEA sees coming down the pike.

OPEC+ has to wrestle with which of these forecasts (along with a long list of others) is closer to the mark. If U.S. shale is slamming on the brakes, then it might not need to do anything other than extend the current arrangement. If frackers are merely pausing, or even manage to continue to grow output with fewer rigs, then there could be a deeper supply surplus to deal with – which, of course, would only exacerbate the financial malaise in the shale industry.

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In any event, analysts see little chance of a rebound in prices. Reuters surveyed 42 economists and oil market analysts, and combined they see an average Brent price of $62.50 per barrel in 2020, not all that different from where the benchmark price has been trading in recent months. “There is simply too much oil in the market,” LBBW analyst Frank Schallenberger said, according to Reuters.

Perhaps OPEC+’s biggest hurdle would be building a consensus for something new. Getting so many countries on board with the original cuts was a monumental task. There are competing interests and building consensus is always challenging. However, getting them all to agree on deeper cuts is a much more complex problem. In other words, even in the face of a worsening glut, the odds are stacked against OPEC+ agreeing on steeper reductions.

That is why most analysts see a basic extension as the final product from Vienna. OPEC+ might be able to sweeten the pot a bit by wringing out commitments from the laggards to comply with the agreed upon limits. But that’s probably all they will be able to do.

By Nick Cunningham of Oilprice.com

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