Russia’s President
Vladimir Putin waves to the media prior to a meeting of leaders of the
BRICS emerging economies at the Itamaraty palace in Brasilia, Brazil,
Thursday, November 14, 2019.
Pavel Golovkin | Pool via Reuters
- OPEC and Russia, or OPEC Plus, meet in Vienna next week, and it is widely expected oil ministers will extend their production cut agreement to June or even the end of next year.
- There are rumblings that Russia has not been happy with the structure of the deal, and may want to find a way to limit participation.
- The meeting coincides with the initial public offering of Saudi Aramco, and there is also speculation Saudi Arabia may want to find a way to boost oil prices.
OPEC and Russia are likely to extend their oil
production deal at least through midyear, but if they were to cut more
output, as some speculate, it would blindside what has become a
complacent market, analysts said.
The ministers head into the Dec. 5 and 6 meeting with oil prices near their highest levels in two months. OPEC and Russia and other allies have an ongoing agreement to reduce output by 1.2 million barrels a day, with the biggest cuts coming from Saudi Arabia.
“At this stage, it’s not perfect for a number of producers, but it’s not catastrophic either,” said Helima Croft, global head of commodities strategy at RBC. “We’re kind of treading water.”
The current agreement expires in March, but many analysts expect the OPEC plus group to extend it until its next meeting in June or even to its meeting a year from now.
“It’s a very unsettled time for OPEC. The gulf between the haves and have nots has widened. Price relief has not been enough to stave off social unrest in a number of key producer states. ... There’s no better option at this point,” Croft said. ”...We’ve had almost like a second Arab spring.”
Croft expects the deal to be extended until June, and then ministers will again review it. Many other analysts expect the cuts will be extended as well, but some believe OPEC and Russia could cut even more.
“A Hollywood shock ending would be if they actually went deeper,” Croft said.
The ministers head into the Dec. 5 and 6 meeting with oil prices near their highest levels in two months. OPEC and Russia and other allies have an ongoing agreement to reduce output by 1.2 million barrels a day, with the biggest cuts coming from Saudi Arabia.
“At this stage, it’s not perfect for a number of producers, but it’s not catastrophic either,” said Helima Croft, global head of commodities strategy at RBC. “We’re kind of treading water.”
The current agreement expires in March, but many analysts expect the OPEC plus group to extend it until its next meeting in June or even to its meeting a year from now.
“It’s a very unsettled time for OPEC. The gulf between the haves and have nots has widened. Price relief has not been enough to stave off social unrest in a number of key producer states. ... There’s no better option at this point,” Croft said. ”...We’ve had almost like a second Arab spring.”
Croft expects the deal to be extended until June, and then ministers will again review it. Many other analysts expect the cuts will be extended as well, but some believe OPEC and Russia could cut even more.
“A Hollywood shock ending would be if they actually went deeper,” Croft said.
An IPO in waiting
The
meeting comes at a key time for Saudi Arabia, which will be issuing
stock in its state-run Saudi Aramco for the first time ever, just as
OPEC’s meeting gets underway.
“It wouldn’t surprise me if the Saudis would go for more [production cuts], to tighten the market even more than they have already,” said John Kilduff of Again Capital. Kilduff said Saudi Arabia may want to make sure oil prices continue to improve, especially in light of the Aramco offering.
Russian energy minister Alexander Novak has said he doesn’t favor increasing the size of the cuts, and the Russian position is that members should be forced to comply with the current level of production.
Russia has also been angling to have condensates removed from the deal, meaning it would only to have its actual crude oil production counted, not other petroleum byproducts. If that were to happen, Russia’s share of the cuts would fall since its overall production total would drop.
“The Russian intentions will be a critical aspect of it for the future, especially with them wanting some wiggle room on the condensate and potentially produce more. They’ll be in the deal in name only,” said Kilduff.
There has been speculation that Russia may be unhappy with the production agreement, in part because its energy companies oppose it.
“It’s not so much that Russia is going to storm out of the meeting. As to what may end up happening, may be more wait and see,” said Citigroup energy analyst Eric Lee. He said it’s possible the OPEC plus group could maintain the status quo, hold off on extending the agreement, and call a meeting for right before the March expiration. That would unsettle the market, he said.
″“Unless they deliver something quite strong and stick to it, then it’s more likely to have some downside risk,” he said.
“It wouldn’t surprise me if the Saudis would go for more [production cuts], to tighten the market even more than they have already,” said John Kilduff of Again Capital. Kilduff said Saudi Arabia may want to make sure oil prices continue to improve, especially in light of the Aramco offering.
Russian energy minister Alexander Novak has said he doesn’t favor increasing the size of the cuts, and the Russian position is that members should be forced to comply with the current level of production.
Russia has also been angling to have condensates removed from the deal, meaning it would only to have its actual crude oil production counted, not other petroleum byproducts. If that were to happen, Russia’s share of the cuts would fall since its overall production total would drop.
“The Russian intentions will be a critical aspect of it for the future, especially with them wanting some wiggle room on the condensate and potentially produce more. They’ll be in the deal in name only,” said Kilduff.
There has been speculation that Russia may be unhappy with the production agreement, in part because its energy companies oppose it.
“It’s not so much that Russia is going to storm out of the meeting. As to what may end up happening, may be more wait and see,” said Citigroup energy analyst Eric Lee. He said it’s possible the OPEC plus group could maintain the status quo, hold off on extending the agreement, and call a meeting for right before the March expiration. That would unsettle the market, he said.
″“Unless they deliver something quite strong and stick to it, then it’s more likely to have some downside risk,” he said.
The ‘Sultan of Oil’
Lee
said it’s even possible Russia and Saudi Arabia could ultimately break
off their agreement, and it may have been ended already were it not for
Russia’s problems with contaminated oil earlier this year. The incident forced it to reduce exports, and it came into compliance with the accord.
But most analysts say the agreement has support from President Vladimir Putin and that’s what matters most.
“He’s the new sultan of oil,” said Kilduff. Even Putin mentioned the Aramco IPO when discussing OPEC recently in Brazil.
“We have really constructive dialogue with OPEC,” Putin was quoted as saying.
“We understand that the tough stance, including from our friends from
Saudi Arabia, is linked to the Saudi Aramco IPO. Everybody understands
this. It’s an open secret.”
Russian energy companies are set to
meet with Novak later in the week. “It helps Russia’s bargaining
position if Novak goes into the meeting and says he has a coalition of
producers who don’t like the cuts,” she said.
Croft said the
Russian relationship with OPEC, or Saudi Arabia, is important, and Putin
supports the arrangement so Russia will be behind maintaining an
agreement.
“I think the financial benefits and the soft power
strategic gains far outweigh the cost of shutting down several hundred
thousand barrels,” said Croft. “The broader Russia Inc has gained
enormously in terms of new deals that have been signed with Saudi Arabia
and the UAE...The ultimate decision maker is Vladimir Putin and the
deal provided significant dividends.”
Kilduff said oil prices
could go higher because currently the market is ignoring turmoil in the
Middle East and is mostly focused on the trade talks between the U.S.
and China.
Croft noted that protests in Iraq, near energy
operations in Basra, could impact oil output if energy workers got
involved. There has been unrest across the Middle East, including in
Iran, where protests against the government are increasing as the
economy worsens and Tehran cut gasoline subsidies.
“The futures
market is signalling that the market is tightly supplied at the moment,”
said Kilduff. Brent futures were at $64.28 per share late Tuesday, near
its highest level in two months.
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