OPEC: rock and a hard place

Published at 11:41 22 May 2017 by . Last edited 15:12 5 Nov 2018.

On Friday 26 May, at 14:00 BST we will be holding a global call for our clients ‘No more Danube blues: OPEC meeting recap’, looking at the aftermath of the OPEC meeting. Clients can register here to attend.

In what should have been a fairly simple meeting, OPEC finds itself in a bind. The first five months of the deal have been challenging, as OPEC exports have not fallen by as much as production while a recovery in Libyan and Nigerian output has partially thwarted efforts by others to reduce production. So, the group needs to regain the market's trust by coming clean (and focussing) on exports while also establishing a roadmap for reintegrating Nigeria and Libya back into the deal.

The market is also expecting 'something extra', especially as Saudi Arabia and Russia have already committed to extending the deal by nine months (when the market was expecting a six month extension)—so a ratification of the deal for nine months by the whole group (which we expect) will no longer be a surprise. A deeper cut—which is not highly likely in our view—will not just help sentiment but will accelerate the market rebalancing and the flip of the curves to backwardation.

Still, given the toxic sentiment in the market and the media, a sharp jump in prices is hardly a given. So, OPEC needs to focus on the physical market and cleaning up the overhang, and allow a tight market to dictate prices. Demand should provide a helping hand here, as after a weak Q1 17 mired in destocking (1.2 mb/d y/y growth following eight quarters of near 2 mb/d of y/y demand growth), real-time inventory and products prices suggest demand is recovering strongly.

Indeed, despite 9.1 mb/d of persistent USGC crude runs, product stocks are drawing, while these runs have helped support US crude differentials. Not only are medium sours strong, WTI-Midland differentials are trading just 35 cents under WTI-Cushing. With GCC exports to the US set to fall sharply from late June, this tightness should persist especially if runs can hold at these levels.

Global oil demand, y/y change, mb/d Cushing WTI-Midland WTI, $ per barrel
Source: Energy Aspects Source: Argus, Energy Aspects

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