BOSTON, MA, December 1, 2017
OPEC Puts Icing on the Cake
As expected, OPEC and its non-OPEC partners have extended their production agreement through 2018 and even assigned “soft targets” to include Nigeria and Libya. Saudi Arabia’s Energy Minister, Khalid Al Falih made it clear in his opening remarks that the goal of the year-old deal had not been fully achieved, notably referring to the IEA’s five-year average stock levels, and indicating that the job of reducing inventories was only half done. On a more practical note, the coalition of countries in this deal, and the special treatment of some members, has been a tremendous diplomatic accomplishment, one not easily reconstituted. So, it makes sense to agree to carry on at this juncture. You can always abandon an agreement. It is much harder to recreate one of this breadth. The existing production deal was a rich layer cake, this extension puts icing on the cake.
OPEC and its non-OPEC colleagues have made a good decision. There is more to do to defend the current $60-plus Brent, and this extension of production restraint, along with falling Venezuelan output, should ensure higher Brent prices. But for how long will they stay the course?
The five-year stock level target has always been a canard. Stocks rise over time as an industry expands. So, that is a goal that is easily rationalized away at some point. The variable to keep track of is the Brent price. A year ago, when OPEC was deliberating the original deal, Brent was in the mid-$40s. Now it’s in the low $60s. If Brent stays over $65 for months, the OPEC-non-OPEC deal will weaken. The signatories have indicated they will review the deal next summer. By then, all other things held equal, this deal will begin unraveling. Ironically, to the degree this view is shared by others in the market, concern over higher output late in 2018 may take some of the strength out of Brent between now and then.
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