Tuesday 22 January 2019

Opec output cut level key to markets: Barclays

LONDON, November 27, 2017

A six- or nine-month extension of the Opec deal is likely to be agreed to on November 30, said British multinational bank Barclays, highlighting that the extension length is less important than the quota level.

“Whether or not the countries extend and the duration of the deal is not the relevant questions in our view. We believe the level of the cut is what really matters, and we assign a low likelihood to this detail being announced on November 30,” Barclays said in its Opec Review.

“The Opec/Non-Opec Declaration of Cooperation (DC) was always meant to be flexible. The Joint Technical Committee and Joint Ministerial Monitoring Committee can suggest changes at any time. Even if the deal ‘ends,’ we would not expect an onslaught of new production from DC participants,” the bank said.

“On November 30, member countries are unlikely to provide clarity on production levels in 2018, leaving the market to presume that the cuts will remain intact. That would be a misguided assumption in our view, and we do not expect these levels to remain static during 2018.

“However, market-management mode should remain the theme for the foreseeable future. The alternative, lower prices, should keep all countries in support. Significant swing potential revolves around the flexible four: Saudi Arabia, Russia, UAE, and Kuwait. Other participants are unlikely to veer from their current output trajectories, in our view.

“Understand what motivates the flexible four. The sustainability of the deal depends on how much longer they are willing to sacrifice market share in the pursuit of revenue and market stability.

“Oil diplomacy should prevail over renewed geopolitical tensions, reducing the likelihood of a repeat of the failed Doha agreement in April 2016. Large financing needs in Saudi Arabia, along with protracted fiscal consolidation and recent political reshuffling, will increase the near-term focus on oil price stability. Russia will also remain supportive since economic vulnerabilities have not gone away and a presidential election is scheduled for March 2018.

“Assuming Opec and non-Opec participants sustain current output levels, the global supply-demand balance would slip from a slight surplus to a slight deficit. All else equal, reducing the output from these countries by a further 550,000 barrels per day (b/d) would lower inventories by 153 million barrels during Q2 to Q4 2018. But in the $60-70 per barrel range, US tight oil, Chinese import levels, and global oil demand growth will not stand still and would likely cause a hangover for the oil market.

“This week, we expect volatile prices as market participants shed length. Prices might fall in the immediate aftermath of the deal as speculative length ‘sells the news.’ Still, fundamentals should keep Brent at an average of $60 per barrel this quarter,” Barclays concluded. – TradeArabia News Service

Tags: | Opec | Barclays | output cut |

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