Today the cartel has its big day. Every six months, OPEC meets at its headquarters in Vienna to make important official decisions. For years there has been only one topic. How can the cartel be held together to reduce oil production together? Because they need a significantly rising oil price, especially in the Gulf states, where government budgets live de facto only on oil revenues. According to the agreement, OPEC has been officially cutting 1.2 million barrels a day for some time now, and its 11 external partners (above all Russia) are officially cutting 0.6 million barrels a day.
OPEC has several options
Today, probably in the afternoon or early evening, there will be a decision in Vienna. Tomorrow OPEC will meet together with its external partners, but the important decisions will be made today! The current production cut ends in March 2020. Simply said, there are three options. Option 1 is the phasing out of the cut. Then, from April onwards, significantly more oil would probably be pumped onto the world market. Since the market would, of course, price in this scenario immediately, the oil price could start to fall sharply this evening. This option is therefore rather unlikely.
The second option is a possible compromise. It would be to extend the existing agreement from the end of March to the end of June. So that at the next meeting in six months they could decide whether to extend the cuts again from then on. But we have already made a number of comments on this. OPEC wants to see a higher oil price. And only the constant prolongation of cutback measures (as in the past) will not give an impulse to the futures market, where prices are made!
Option 3 is the extension of the reduction amount. Rumours say the Saudis want OPEC to decide today to extend the cut from 1.2 to 1.6 million barrels per day. This would be an impulse that could lead to a sharp rise in oil prices on the market. Because less supply on the market tends to lead to rising prices! Some oil ministers from other participating countries should also be prepared to increase the amount cut. But as always before an OPEC meeting, it is unclear which scenario the oil market has priced in beforehand.
Russia as a problem
Russia was already at the table during the last meetings in Vienna when OPEC made its internal decision. That’s probably the case today. And the signals from Russia say that Moscow will probably not participate in the expansion of the cuts. And also some rather unreliable OPEC members are a problem. For quite some time now Saudi Arabia has been cutting far more than it would have to itself in order to compensate for too few cuts by partners. Ultimately it is the Saudis who have kept this official cut deal alive with their cuts of often more than 1 million barrels a day. According to recent rumours, however, it is more than doubtful whether they will continue to want to compensate for the unreliability of partners. What will happen today is unclear. And it is exciting. OPEC must actually expand the cutbacks because frackers in the USA are pumping more and more oil onto the market. Next year’s oversupply is inevitable unless OPEC cuts more. It is possible that OPEC will expand the reduction in volumes and that Russia will no longer participate.
Traders in oil will be interested to know whether the market has already priced in an increase in the volume cut or not! We will be reporting this afternoon.