Industry experts warn that despite apparent support from non-OPEC member Russia, the cartel's production cut could still fall apart as individual nation's quotas are determined.
With this, the second 2016 summit to discuss an OPEC attempt at market stabilization, in play, oil and gas industry analysts remain largely hesitant to call this week’s production cut pledge an absolute win.
Analysts at Tudor, Pickering, Holt & Co. acknowledged their pleasant surprise that the group could settle together on a deal, but also recognized there is a long game ahead.
“OPEC pulls victory from the jaws of defeat as they surprise the market (and us) by announcing a production cut when the overwhelming consensus was that an agreement to merely freeze production would not be possible,” TPH said.
One thing the decision and market reaction proves is that OPEC is not irrelevant, TPH said. The organization has reasserted its place on the map and its importance as the producer of one-third of the world’s oil.
TPH said it could be that OPEC nations are testing the “low price pain threshold.” Or, it could signal that OPEC is feeling optimistic about demand. And, it might light a fire under money managers who have been hesitant to engage.
The Devil in the Details
Despite the loose ends, OPEC has agreed to reset production at 32.5 million barrels per day (bpd) from August levels of 33.5 million bpd – essentially cutting production by 1 million bpd. Exactly how the new cap will work is expected to be laid out during OPEC’s regular meeting Nov. 30. And while there is now an agreement in principle, analysts at Morgan Stanley warn the deal could still fall apart – but with Russia’s willingness to freeze, just not cut, production, there is more support for success.
TPH estimates that Saudi Arabia, the largest OPEC producer, will reduce its output to account for around 500,000 bpd, but questions remain about how other member nations will participate. Libya and Nigeria have struggled under geopolitical unrest that has tamped down their production already.
“Lots to ponder over the next couple months,” TPH wrote. “Meanwhile, U.S. inventories show the global market is undersupplied. OPEC actions will accelerate the inventory drawdown and the price recovery.”
At Jefferies, analysts were skeptical of any effects in the physical crude market.
While the target is in effect, individual country quotas have yet to be set. Jefferies noted that some speculation that Saudi Arabia will return to its former role of the swing producer, and that Iran would take an exemption to increase output somewhat to keep the country close to its pre-sanction levels. Nigeria and Libya would also be treated as special cases.
“We believe that all other OPEX producers except Saudi Arabia are currently producing at their full capacity,” Jefferies said. “In fact, we expect that 12 to 18 months from now, the markets’ focus could shift to the near-complete lack of spare capacity in global supply.”
With news of the plan, $50 oil may be the new norm. Jefferies maintained its forecast of $50 per barrel in the fourth quarter 2016, growing to $58 per barrel in 2017 and $72 per barrel in 2018.
Houston analyst Carl Lewis said he expects the market now has a $50 target in mind. However, he said, how much support that will get between now and November remains to be seen.
And, at Morgan Stanley, analysts simply said the OPEC intervention might not be “as good as it sounds.” Essentially, there is a lot to be determined in the details, and the history on how that would shake out is scarce.
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