Russia keeps market guessing ahead of Vienna OPEC meeting

Despite its best efforts, Saudi Arabia has yet to convince Russia to commit – at least not publicly – to extending the OPEC /non-OPEC production cut agreement through the end of 2018, injecting some uncertainty ahead of Thursday’s closely watched meeting in Vienna.

Traders have priced in the nine-month extension favored by the Saudis as a fait accompli, betting that its energy minister Khalid al-Falih’s oil diplomacy efforts will win the day.

But the mixed signals from Russia, whose energy minister Alexander Novak has said he would prefer to wait until closer to the deal’s March expiry to announce any decisions, has many analysts warning of oil market volatility in the week ahead, as headlines and rumors of handshake agreements and horse trading come hot and heavy.

“Russian dithering on the timing of a decision of an extension or its duration is exactly what can make the oil market nervous,” analysts with investment bank UBS said in a note Friday. “Should the outcome of the next OPEC meeting fall short of expectations, the large net?long speculative position on oil futures can unwind, sending prices lower and volatility higher.”

The cut agreement calls on OPEC and 10 non-OPEC partners, led by Russia, to cut a combined 1.8 million b/d through March in a bid to draw down inventories of oil in storage and hasten the market’s rebalancing.

While the market has tightened considerably in the past few months, OPEC kingpin Saudi Arabia is seeking to continue the cuts through the end of 2018 to keep prices stable as it embarks on significant economic reforms and the possible listing of its state-owned oil company Aramco.

But any such deal would need to have the backing of Russia, the world’s largest producer with some 12% of global output, to have any bite, given OPEC’s diminished market share.

Novak has said he supports continuing the cuts, but has repeatedly declined to say for how long exactly. Many Russian oil companies have made known their discomfit with the deal to begin with, and Russia is also wary of sending oil prices too high, which would strengthen the ruble and hit its export economy.

“Nearly everybody speaks today about the necessity to extend the deal,” Novak said in an interview Friday from Bolivia with Russia’s RBC TV network, which was posted on the Russian energy ministry?s website. “In principle, Russia also supports those proposals. Different options are being considered.”

Yasser Elguindi, an analyst with consultancy Energy Aspects, said the recent rise in prices, driven by robust demand and tighter supplies from the OPEC/non-OPEC cuts, has given some members of the 24-country coalition pause to consider how aggressive they should be, particularly if 2018 demand shapes up to be similarly strong.

Higher prices would also unleash more US shale production, as companies hedge output, a major concern of many OPEC members.

ICE Brent futures, which were trading at $63.56/b late Friday, are up some 42% from the 2017 low of $44.82/b in June.

“The goal is not to overtighten the market,” Elguindi said. “They’re worried about the upside more than the downside. They’re trying to give themselves maximum flexibility and optionality. That’s the only reason for this debate. It’s not that they want to abandon the agreement and produce as much as they want.”

If no consensus forms around the nine-month extension, the coalition could opt for a shorter one of, perhaps, three months, which would take the agreement through the next OPEC meeting, slated for late June.

Another possibility, according to OPEC watchers, is that the level of the cuts could be tied to market conditions, with perhaps the five-country Joint Ministerial Monitoring Committee – composed of Kuwait, Russia, Venezuela, Algeria and Oman – making recommendations as it meets every two months to the full 24-country coalition.

“I think the risk that they might not meet market expectations is likely to try to make them employ some kind of face-saving measure,” said Michael Cohen, an analyst with investment bank Barclays . “Who knows whether the market will embrace that with not much of a price change.”


Ministers will begin arriving in Vienna early in the week, with bilateral and multilateral meetings – some scheduled, some ad hoc – to be held in various hotels downtown.

On Wednesday, the JMMC, chaired by Kuwait, will meet at the OPEC secretariat, where it will assess compliance with the deal, review market conditions, and possibly draft recommendations on the future of the cut agreement for the full coalition to consider.

On Thursday, OPEC ministers will gather for their formal biannual meeting, with the opening session scheduled to begin at 10 am local time, according to an agenda posted on the organization’s website.

The non-OPEC ministers will then join their OPEC counterparts at 3 pm local time for their meeting. Up to 20 additional countries beyond the current 24-country coalition have been invited to the meeting, a source told S&P Global Platts on Thursday.

These include Chad, Ghana, Cameroon, Congo-Brazzaville, Niger, Mauritania, Cote d’Ivoire, Turkmenistan and Uzbekistan.

A press conference to announce any decision and a formal communique is scheduled for 5 pm local time, though that can – and often is – delayed if the talks require more time.
Source: Platts