Officially, OPEC+ won’t meet until next week, but when it comes to whether the output cuts will be extended, there are only two people whose opinion actually matters: Vladimir Putin and Saudi Crown Prince Mohammed bin Salman.
The two met at the G20 in Japan and, according to Putin, agreed that the OPEC+ agreement would be extended for six to nine months. “We have agreed: we will continue our agreements”, Putin said. “In any event we will support the continuation of agreements, both Russia and Saudi Arabia, in the volumes previously agreed.” The output cuts would have expired at the end of June.
That would appear to be that. In other words, next week’s OPEC+ meeting is now just a formality. The outcome is all but certain.
Oil fell into a bear market last month amid mounting global growth jitters tied to the trade war and swelling US stockpiles. Recently, however, crude has managed a rebound thanks in no small part to worsening hostilities in the Mideast, where a string of attacks on vessels in the Strait of Hormuz and the downing of a US surveillance drone have brought the US and Iran to the brink of war.
Oil’s plunge in May was the second such harrowing decline over the past year. In November, crude was summarily routed after Trump effectively duped OPEC (he spent the summer badgering the cartel to ensure that his maximum pressure campaign on Iran didn’t push prices too high and then, once the Saudis got on board, he granted waivers in November allowing eight nations to continue purchasing Iranian crude). Eventually, prices plunged through key levels tied to producer hedges. Banks’ subsequent efforts to manage their positions exacerbated the slide. By the time OPEC+ stepped in in early December, crude was on its way to suffering a third consecutive month of grievous losses.
Obviously, the fact that the cuts need to be extended is a reflection of the extent to which global growth concerns continue to weigh on the demand outlook. That it took the US and Iran nearly coming to blows to push prices higher after the May slide speaks to the idea that geopolitical flareups and the crisis in Venezuela aren’t sufficient to overshadow a US supply glut and the specter of demand destruction.
“[Putin’s] announcement marks the first time a senior leader from [OPEC+] has indicated the curbs could be needed into 2020”, Bloomberg wrote Saturday. “That reflects a somber outlook for oil supply and demand next year due to a combination of slowing global economic growth and rising US shale output”.
Late Friday, oil dove on news that the European special purpose vehicle designed to promote legal trade with Iran (in apparent contravention of US sanctions) is up and running. In the same vein, BofA has posited an “uber-bearish” scenario in which China becomes incensed with Trump and decides to buy Iranian crude with no regard for Washington.
But the trade truce struck between Trump and Xi on Saturday in Osaka should be a positive development for crude, and, along with the extension of the OPEC+ agreement and a dollar that looks set to move steadily lower as the Fed cuts rates, the outlook for oil has ostensibly brightened.
Of course, it all hinges on whether the global economy averts a deeper downturn. The jury is still out on that and will be for months to come.
As far as the tug-of-war between OPEC and US shale goes, Goldman was out on Thursday reiterating the basic tenants of their long-held assessment. The OPEC dilemma is that “while cuts can support oil prices above shale marginal costs initially, this can only be sustained at the expense of ever diminishing volumes and revenues or because of ever rising disruptions”, the bank wrote.
“A return to production growth in 2020 to increase market share would likely lead to a sharp collapse in prices, which would extend the tug of war between OPEC and shale with the former ramping up production in 2015-2016 but shale growing sharply in 2013-14 and 2017-2019”, Goldman continued, adding that “the only two outcomes where this can be avoided are steadily rising disruptions (with both OPEC and shale growing in 2H18) and strong demand growth”.
The bank goes on to call the scope for further downside in Iranian and Venezuelan production “limited” and the candidates for further big disruptions next year “few” barring “a dramatic escalation of Middle East tensions”. On the outlook for demand, Goldman tells a familiar story. “Slowing activity and escalating trade wars are casting doubts on a potential strong global growth acceleration by next year”, the bank concludes.