Taper tantrum 2.0

Published at 11:23 4 Dec 2017 by . Last edited 12:35 4 Dec 2017.

OPEC and non-OPEC countries decided to extend the current output cut deal through 2018, albeit with a ‘review’ in June 2018. However, all the hand-wringing over this review is wasted energy, as the meeting will have the same agenda as every other regular OPEC gathering—oil market proceedings. The insertion of a June review was undoubtedly to alleviate concerns by Russian oil companies that would like some details over how an exit is going to unfold. But the point is, OPEC can call an emergency meeting at any time during the year should markets overtighten.

Libya and Nigeria were brought into the deal, having been exempt this year. However, OPEC kept the overall output reduction unchanged at 1.2 mb/d. Higher Libyan and Nigerian production has been partially offset by steep natural declines in Venezuela and to a lesser extent Angola—a trend we see continuing through 2018. But we also believe Saudi Arabia will be proactive in ensuring overall compliance remains high, squashing fears that production could rise back to Q4 16 levels.

Indeed, there were plenty of suggestions that $60+ Brent was emerging as a preference for the group, and Saudi Arabia in particular given the rising outlays associated with the Yemen war. $60 is not a price trigger that will be defended at any cost, nor are we implying that the much-hated ‘price band’ will come back. But Saudi policy is likely to be proactive below $60 per barrel.

The OPEC extension pushes our global stockdraws for 2018 up to 0.4 mb/d from earlier forecasts of 0.15 mb/d. Stocks will still build in Q1 18, but by less than historical norms, and draws should begin strongly from mid-Q2 18 as demand rises, supporting steep backwardation. While prices will likely ease over the next few months seasonally, they should rise into the $70s in H2 18.

Fig 1: OPEC production, mb/d Fig 2: Global implied stock changes, mb/d
OPEC Production Global implied stock changes
Source: Energy Aspects Source: Energy Aspects

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