Khalid al-Falih, Saudi Arabia's Energy Minister, said on Thursday that he was optimistic for an OPEC production cut deal:
If the deal ends up being at 32.5 million b/d, that would be very bullish for the oil markets. Call for OPEC supply is currently around 33 million b/d, so the 500k b/d difference will further accelerate storage draws and push oil prices higher.
Current reports continue to suggest that Iran and Iraq are the roadblocks to a deal. Current evidence points to Saudi Arabia sidestepping the idea of forcing Iran and Iraq to "cut" production, and instead is pushing for them to freeze production. Iran and Iraq will likely be doing some last minute production ramps up to achieve this "higher production freeze." We think this arrangement should work because Iran and Iraq's short-term attempts to boost oil production will only see it decline in the following months. Whatever capex spent in the following months will be to replace the declining production. Saudi Arabia knows this fully well, but the key is to get these two countries to agree to secondary sources.
What could potentially stop the deal from happening? If Iraq and Iran "fail" to increase production in the short run as we have suspected all along due to lack of funds, then there could be some jawboning around the table. What this presents is just more negotiations with Iran and Iraq. For example, Saudi Arabia could propose freezing their production at December volumes vs. November. If Iran and Iraq agree to that, they have another month to try and push up production as fast as possible. But like terrible poker players, Saudi Arabia will call Iran and Iraq's bluffs. All Saudi Arabia needs out of this deal is for the two sides to agree to using secondary sources for production estimates - and if they agree, Saudi Arabia would get the OPEC deal it wants.
For a deal at 32.5 million b/d, we would need to see a production decline of 1.2 to 1.3 million b/d. We know that recently Nigeria oil production has fallen by 400k to 500k b/d. Venezuela's oil production will decline to 1.9 million b/d (according to secondary sources) or a decline of 200k b/d. That leaves 500k to 700k b/d left to cut. Saudi Arabia's natural seasonal decline should see production drop to 10.2 million b/d, or a decline of 400k b/d from 10.6 million b/d. If Saudi Arabia cuts another 200k b/d, as we said in this report, and its Gulf allies cut 100k b/d, OPEC would be able to reach the 32.5 million b/d agreement. Declines in Nigeria are unpredictable, and we can see why OPEC announced a "range" of 32.5 to 33 million b/d. The 500k b/d difference is to account for Nigeria in case it recovers production, which we don't think is highly likely.
All eyes over the next several weeks will be on the OPEC production deal, and we believe a deal should go through. The structure of the deal could be that OPEC agrees on capping production at 32.5 million b/d initially, but if Nigerian production recovers, then the cap would be moved to 33 million b/d. If the deal goes through, we think oil prices will respond very positively with a move to $60 by year end.
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