OPEC and non-OPEC have made moves to track crude oil exports side-by-side with production, and are looking to bring about an extension to the current 1.8 million b/d output deal that ends in March 2018 and involve outliers Nigeria and Libya to the arrangement.
Amid so many oil market narratives and counter-narratives, have OPEC and non-OPEC become the authors of their own rebalancing story? Paul Hickin examines what the end game could look like and whether it can be achieved with many known unknowns both within and outside the producer pact.
Related article: OPEC holds line over oil output cuts, to track exports
Let me tell you a story. But which one? Bulls versus bears. Shale against OPEC. Supply or demand. Production versus exports. Stock levels coming down at different rates under various measures. Like the parable of the blind men who encounter an elephant, feeling different parts of its body and coming up with a different conclusion, the oil market rebalancing story is no stranger to a partial experience being presented as the truth.
The cacophony of narratives is the challenge facing OPEC as it tries to manage both the market and its expectations. No matter how good OPEC’s story, it needs to be believed and sadly for this bunch of oil producers, which includes the 14 members and 10 others including Russia, there are just too many plot holes leaving oil prices in their own kind of purgatory.
Let’s take compliance. Usually nine months of fairly robust conformity to the 1.8 million b/d production cut deal would be enough. But questions were raised about overall output with Libya and Nigeria both recovering at rates few predicted and whether the cuts were translating into reduced supply.
Nigeria and Libya are unlikely to cap production until they reach 1.8 million b/d and 1.25 million b/d which would render the curbs relatively meaningless. In Vienna last week the producer group did manage to agree on informal export monitoring to give credibility to the narrative that crude is being removed from the market.
Then there is the Saudi Arabia line that OPEC will do “whatever it takes” with the idea that the cuts may go deeper or last longer than the March 2018 expiry date. Both are likely to be a work in progress until the Vienna meeting on November 30 with prolonging the current the deal the most realistic aim.
But there is the oxymoron of coaxing the market into believing what you say which in turn lends support to prices and being underwhelmed when you deliver what you intended leaving prices to sag: a point OPEC took note of at its May meeting when it extended the deal for nine months rather than six.
As such, OPEC and non-OPEC has shifted the focus: to strong production cuts, to falling stock levels, robust Asian demand and now to supply cuts.
But what does a happy ever after look like to OPEC? Some will point to higher prices, some will point to a price floor and some will point to price stability long-term and a backwardated market. All of which will make OPEC optimistic right now.
Then again, others will say that the end is elusive while its arch enemy shale continues to take market share at every dollar above $50/barrel and that abandoning its pump-at-will strategy was a miscalculation. Again, making OPEC cautious about its strategy.
Maybe the aim for OPEC is to be able to manage the market as my esteemed colleague Gary Ross at PIRA says “into perpetuity”. Selling the benefits of long-term market management to its own non-OPEC alliance may be the next chapter.