While there was a lot of uncertainty about the OPEC+ meeting, this headline (from Bloomberg) was not one of them...
*SAUDI ARABIA MULLS RESIGNING ROLE AS CO-CHAIR OF OPEC+ JMMC The reaction in crude prices was insta-selling, pushing WTI back below $45...
While the headline is unclear, it strongly suggests that the discord within OPEC+ is far greater than was believed; and the fact that it is only these relationships that are holding the entire energy complex up in the face of lockdown-inducing demand slumps is worrisome.
The move is likely simply a negotiating ploy to drive UAE to agree to extend production cuts (which will require prices to drop first to apply that pressure).
OVERVIEW:
OPEC and OPEC+ producers are meeting on November 30th and December 1st respectively, to discuss and draft a potential tweak to the current Declaration of Cooperation (DoC), rolled out in light of the pandemic to recalibrate the demand /supply imbalance. Monday's meeting is slated for 13:00GMT, subject to delays. The current DoC is split into three phases:
Market expectations are still leaning towards the second tranche (7.7mln BPD cuts) being extended through Q1 2021, a view which was also backed by Goldman Sachs, ING, and UBS, despite positive vaccine developments and amid rising production in Libya. Recent sources also noted OPEC+ is still leaning towards a rollover of the current tranche notwithstanding the recent oil price rally, albeit with some sources suggesting by 2-3 months and some through Q1 whilst the most recent sources suggested 3-4 months- with Russia also likely to agree to the full quarter if necessary. However, enthusiasm for cuts is not universal - with some OPEC+ officials cited by EnergyIntel to not be on board with the full "plan" on Sunday. Russia is also said to insist on gradual monthly increases in output from January, sources stated.
SUNDAY JMMC MEETING
The informal consultation between Russian, Saudi, and JMMC heads was moved to Sunday ahead of the decision-making meeting. The panel of OPEC+ ministers could not reach an agreement on the extension of current cuts, with most participants reportedly supporting a delay of hikes through Q1 2021, but UAE and Kazakhstan opposing. Tass citing sources said Russia and Saudi Arabia have reached consensus on extending the current level of cuts through the first months of next years, but the two producers still had to "coordinate 'certain details and the mechanism' of the extension". Meanwhile, sources cited via Argus Media on Sunday said "A rollover would most likely be for one quarter... This would avoid flooding the market in January-March - a period of typically slower demand."
NOVEMBER JMMC FALLOUT
The Joint Ministerial Monitoring Committee (JMMC) statement on November 17th gave no detail on its recommendations but said it will be provided on December 1st. The Committee reiterated the "critical importance of adhering to full conformity and compensating the overproduced volumes, in order to achieve the objective of market rebalancing and to avoid undue delay in the process." There was also chatter that OPEC+ is mulling deeper production cuts, though this was dismissed by delegates on Sunday who suggested no talk of collective deeper cuts.
COMPLIANCE COMPLICATIONS
Compliance among producers remains an issue as the latest October figures from the JMMC suggest sub-par conformity, namely from UAE, Nigeria, Iraq, Gabon, Equatorial Guinea, Angola, and Azerbaijan for a total group cumulative overproduction of 2.346mln BPD (see Figure 1).
Some sources suggested that OPEC+ compliance could still be an issue, however, EnergyIntel's Bakr noted that "The expectation among delegates is that the "'catch up cuts' plan will be extended into 2021 to allow a number of states to reach their quotas"
Related: OPEC+ Expects Oil Market Deficit Next Year
Desks did not expect these compliance difficulties to be a near-term risk given the "vigilant and proactive" stance signaled by OPEC+ in recent meetings, with the group likely to reaffirm its stance on full compliance and specifics likely to be ironed out in the coming months with further compensation quotas.
DEMAND AND OIL PRICE DEVELOPMENTS
The positively received vaccine updates from Pfizer/BioNTech (PFE /BNTX), Moderna (MRNA), AstraZeneca (AZN/Oxford), and the Russian Direct Investment Fund (RDIF) have provided a rosier (or less dire) demand outlook for the complex due to the prospect of a recovery in activity and jet fuel demand. Still, re-emerging COVID-19 cases and uncertain timeframes for mass rollouts of approved vaccines continue to cloud the near-term outlook. Analysts at Goldman Sachs indicate that this solidifies the argument for an extension of current cuts. Further, IEA's November OMR also suggested "it is far too early to know how and when vaccines will allow normal life to resume. For now, our forecasts do not anticipate a significant impact in the first half of 2021." Nonetheless, the vaccine fanfare this month has provided the crude market with a boost, resulting in the Brent curve edging back into backwardation (theoretically a near-term bullish signal) - Figure 2 below indicates the shallowing contango following the releases of each of the three major vaccine updates.
However, ING is skeptical about the recent Brent backwardation into early 2022 given the soft near-term demand outlook and fragile balance sheet over Q1 2021, whilst the WTI curve makes more sense, with timespreads in contango in the near term (reflecting weaker fundamentals) but with backwardation commencing from the May 2021 contract.
The oil producers will have to factor in supply-side developments since the rollout of the DoC, events that were not foreseen nor assumed at the time:
FORECASTS:
Analysts at GS forecast Brent to average USD 47/bbl in Q1 2021 assuming a three-month extension of current cuts, whilst an adherence to the current DoC (i.e. a 2mln BPD production increase) would warrant USD 42/bbl in the period. "This illustrates once again how short-term revenue maximization always comes through production cuts, as a 2 mb/d production increase but $5/bbl negative price impact would end up reducing core-OPEC and Russia's 1Q21 fiscal revenues by more than $5 bn", GS says. Meanwhile, UBS sees a Brent average of USD 45/bbl in Q1 next year (see Figure 3 below), with the assumption of a vaccine rollout in 2021. "A 3-month extension protects price downside as policy struggles to mitigate winter virus waves. 2021 is a year of price recovery and normalization", the bank states.
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By Zerohedge
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Comments
Saudi Arabia is the leader of OPEC. How could it lead if it is rumoured to be thinking of relinquishing the means at its disposal to influence production cuts and prices. Therefore, the rumour that Saudi Arabia is mulling resigning its role as co-chair of the JMMC is fake news.
Another bit of fake news is the claim that Russia not enthusiastic about extending the production cuts for three months when it was President Putin himself who hinted at such a possibility in an interview a few weeks ago.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London