First caveat upfront… never assume anything with the Saudi’s involved! Second caveat… never trust anything with the Russian’s involved!
The above just about makes what I am about to write irrelevant, but I’ll continue on the basis that I think the Saudi’s and Russian’s have nothing to lose, and much to gain.
At present the Saudi’s have signaled an intention to return OPEC numbers to 32.5mbopd. That would require a cut of around 1mbopd. Naturally they would prefer all OPEC members contribute as well as non-OPEC members like Russia. The irony is, Russian and Saudi output has risen by around 1mbopd since September. They are the main reason why numbers are near 34mbopd. If you want PoO to rebalance, then you certainly don’t start pumping more oil than you were doing at the last talks. Unless of course, you are deliberately playing for market share and facilitating some room for a CUT. Furthermore, there are questions over the Saudi’s and Russian’s ability to sustain or even increase production any further than current record peak levels. Many believe they are already at maximum output. And historically… the Saudi’s and Russian’s often shut down wells for maintenance during the winter periods. So, what you might see following the OPEC Nov meeting is a drop in production from Saudi’s and Russian’s regardless of any deal being struck. Of course I doubt they will miss a PR opportunity and let that happen – they will want to manufacture a positive out of what in reality is … going to happen anyway.
So my view is simple … expect a CUT. Why? Because the Saudi’s and Russian’s have nothing to lose by agreeing to one. And … if it is only for 6 months, then it buys all involved a little stability at around $50pb to $55pb range instead of the probable $40pb to $45pb range should a CUT not happen.
So all in all, if they agree to CUT by 1mbopd, then it equates to just 3% of total output. Yet the net result is likely to deliver around a 20% increase in PoO.
But the real story going forwards is whether a freeze at 32.5mbopd will include Iran and Iraq and if not (as currently expected) what are the agreed caps on these two? Will Iran agree to a 4mbopd freeze?
This issue is not in the Saudi’s control. Although the recent TRUMP victory may well have handed the Saudi’s some added leverage. Iran will be concerned over TRUMP and his ability to revise down the Obama led Nuclear Sanction deal. This may not happen until June next year, but it has the potential to CUT 1mbopd from Iran if revised down. The impact of that would send PoO spiralling higher, even to heights of $90pb last seen in 2014. Of course, the Saudi’s and Iraq would plug that surplus and US Shale would kick in once again adding to supplies too. So any PoO prices in that region would come down pretty soon after. But should such an event happen, it could be a lifesaver for many companies and countries as hedges are snapped up and put in place. In theory… a new reduced deal on Iran via TRUMP would solve the PoO crisis in a second. TRUMP has already stated that he wants the US O&G industry to grow again. So watch out for news on TRUMP and IRAN hitting the headlines in the future. The market funded media won’t be spinning that story just yet as they are mostly ‘short’ oil. But that position seems a little old hat now, especially after 2 years+ of lower capex spend by majors which ultimately will lead to lower reserves and shortages in the future. A re-balance of PoO will happen… but the question still remains.. when?
If the Saudi’s and OPEC make a CUT on Nov 30th, it will be a symbolic message of cohesion. In reality they are doing very little but just enough. I can’t see them missing that opportunity as the cost to them is low. What follows in 6 months time could be a new deal on Iran Sanctions and that has the potential to move PoO prices dramatically more than any Saudi CUT deal, that’s for sure.