(WCTW) What To Expect For The Upcoming OPEC+ Meeting?
(WCTW) What To Expect For The Upcoming OPEC+ Meeting?
In our OMF last Friday titled, "Caution, Caution, Caution!" We pointed to the oil market signals we are using still pointing to the bear side. One of the main points we discussed was consensus expectations of OPEC+'s current voluntary production cuts.
On a cursory glance, everyone is expecting the voluntary cuts to continue. Regardless of the notion of whether this is a real OPEC+ cut or not, the reality is that energy investors have to contend with the possibility that OPEC+ has a contentious meeting in June.
Contentious?
Why will it be contentious you ask? Well, there are so many variables involved here that we need to take into account.
2024 is unlike any year, if this were 2023, then we would firmly stand in the camp that the voluntary cut extension is almost a certainty. But because this year is an election year, the US will play a major role in OPEC+ policy.
Then there's the issue of compliance. We are seeing offenders of the cut (Iraq & Kazakhstan) having to compensate for overproduction earlier this year, further non-compliance would simply mean that there's more room for contention.
Demand... is it that bullish? Another key part will be demand and what OPEC+ views demand to be. If OPEC+ is bullish on demand, then it will take the route of unwinding the cut. But if OPEC+ is bearish on demand, then it will have to keep the production cut going, which could in itself (keeping prices high) further dampen demand. Again, it's not as easy as you think.
For us, this OPEC+ meeting will, once again, be in the hands of the Saudis. Like we've said all year long, this is not an OPEC+ cut, but a Saudi cut.
While OPEC+ crude exports fell YTD, most of the decrease is still coming from the Saudis.
As you can see, the delta y-o-y from the Saudi was ~1.3 million b/d, which contributed to the majority of the y-o-y decline.
Other members have only marginally contributed so far, but if you assume a higher export from Iran, this figure will be flat y-o-y.
Because of our variant perception that this is not a real OPEC+ cut but a Saudi cut, we only have to watch what the Saudis want to gauge whether or not the voluntary cut will be extended.
Using this particular insight, we think it will be important to watch the news flows over the coming weeks between the Saudi and US. Given the Biden administration is not exactly on friendly grounds with the Saudis, there's a better than ~75% chance the Saudis maintain the voluntary production cut into year-end. But if that's the case, I am almost certain the US will release SPR around August to combat higher oil prices.
So then this becomes a chicken and egg problem. If the Saudis tell the US that they will unwind the voluntary production cut in exchange for a promise to not release SPR, does the US take that deal? Or is it in Saudi's incentive to keep the voluntary production cuts and force the US to release SPR? I don't know, and quite frankly, I'm leaning towards the 1) production cut extension and 2) the US responds via SPR release.