What To Expect From OPEC+?
The rumor mill has started. And for those who have been following OPEC leaks for a long time, you know that Reuters is the most trustworthy. In this case, the original leak was that OPEC+ was contemplating a cut between 500k b/d to 1 million b/d. By Sunday, this leak has morphed into a possible 1+ million b/d cut, NOT including voluntary cuts.
We think OPEC+ will agree to a 1 million b/d cut with Saudi voluntarily cutting another 500k to 1 million b/d. You will see in the charts below why we have this rationale.
A month ago, you will remember that we published a piece titled, "OPEC+ production cut - a symbolic gesture but a powerful one." In the article, we compared the current oil market environment to that of 2018. This is what we said:
Because for oil watchers and energy investors, the key to figuring out whether or not we could sustain $100+ had in part to do with what the Saudis and UAE wanted.
This is why we believe the symbolic gesture is so important and it flipped the odds in favor of the bulls. For starters, this symbolic gesture all but guarantees that Biden's trip to the Middle East in June was a failed one. Unlike the Trump pressure in 2018, Biden failed to force the Saudis to unilaterally act. Like 2018, Saudis have the ability to increase production within the means of the current OPEC+ quota. Unlike 2018, Saudis are not only not doing anything about it, but they are willing to cut if the macro changes.
For those of you that are new to our writing, why is it that we compare this year to 2018 so much? There are a few important similarities to understand:
Global growth was very strong in 2017. The same could be said of 2021 as the world was recovering from 2020.
Like 2018, there were visible signs of macro pressures heading our way. USD was raging in 2018 as it is today. China/US trade war resulted in increasing uncertainty about global growth. This year, the zero COVID policy in China along with worsening economic growth in China is leading to similar concerns about global growth.
Copper prices were falling in 2018, and similarly, they are weak today.
And for energy investors, 2018 saw energy materially outperform tech from March to October only to falter into year-end. And like 2018, the broad market was very weak, which lead to underperformance for fund managers across the board.
With OPEC+ now discussing a possible 1+ million b/d cut, this all but invalidates the comparison to 2018 with the exception of the macro environment. Unlike 2018 when Trump was successful in getting the Saudis to increase oil production, there's nothing similar today. Instead, what we are left with is the possibility of a voluntary cut from the Saudis.