Rock and a hard place

Published at 12:16 3 Dec 2018 by

On Friday we launched IMO: Vision 2020, a deep-dive report into the IMO 2020 transition that lays out the threats and opportunities for oil markets presented by this upheaval. Find out more.

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Yet another OPEC meeting is upon us. There is no-one in the group, least of all Saudi Arabia, that wants to undo all the hard work of the past two years in bringing down excess inventories by leaving Vienna without a deal. But the increasingly bipolar relationship between Saudi Arabia and the US (Trump’s support vs the rage of Congress) makes it extremely difficult for the Saudis to announce a cut even if it (along with the GCC and Russia) decides to remove the volumes they have put into the market since May—around 1.5 mb/d. There may well be no announced deal.

For all the noise around Russia, the obstacles (the volumes Russia is willing to cut amid demand concerns are lower than the Saudis would like) to Moscow and Riyadh agreeing a deal are not insurmountable in our view. There is a broader agreement to extend the current OPEC+ deal (which would otherwise expire at year-end), but the volume of cuts is yet to be decided.

But even if a deal is agreed upon, communicating it properly to this fragile market will be imperative—a jumbled statement referring to some broad intention to prevent the market from being oversupplied will undoubtedly trigger a further sell-off in prices. Riyadh hopes this will only be for a short period of time, and once the new Congress is sworn in the outcry over the Khashoggi affair will fade. Riyadh could then re-evaluate OPEC policy and prepare the terrain for an extraordinary OPEC summit if needed. In the meantime, Saudi Arabia and its allies will cut output quietly to prevent a rerun of 2014, which will eventually put a floor under prices.

Any cuts made by OPEC+ should focus on light crudes given the structural imbalance gripping the market. The addition of Libya and Nigeria in the cuts will therefore be crucial in the rebalancing.

Global stock change scenarios, mb/d Prompt Brent-Dubai spread, $ per barrel
Global stock change scenarios Prompt Brent-Dubai spread
Source: Energy Aspects Source: Argus, Energy Aspects

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