Earlier in the day, Reuters reported that OPEC is leaning towards a deal extension during the OPEC meeting in May.
"An extension is needed to balance the market," an OPEC delegate said. "Any extension of the cut agreement should be with non-OPEC."
In a premium article we wrote last week titled, " Important Inflection Point - Why Oil Must Go Higher." We said:
"Focusing on incentives continues to be the most important process in our investment research. Understanding why the Saudis are doing WHAT they are doing, WHY they are doing it, and WHEN they plan to do it helps give us a roadmap into understanding investor sentiment towards the oil market.
As a result of the recent interview and the timeline laid out for the Saudi Aramco IPO (late 2018), we believe investor sentiment building upto late 2018 will become more and more bullish. This is precisely what we talked about when we wrote the "What's the Most Important Investment Theme for the Next Five-Years." Oil prices should continue higher throughout this year and possibly reaching $80+ in 2018. This will be through a combination of more positive investor sentiment and global crude storage deficit."
Last November, we said that OPEC would reach a production cut agreement despite wide criticism from other Seeking Alpha contributors and the skeptical consensus. Our conclusion was reached by paying attention to several fundamental forces impacting the global oil supply outlook and paying particular close attention to Saudi Arabia's incentives.
Why is it appropriate for Saudi Arabia to cut back the bulk of the proposed production cut today? What changed since 2014?
The answer is the momentum in production decline we are seeing in non-OPEC producers. Excluding US and Canada, China alone is expected to see oil production drop by 300k b/d in 2017 or offsetting all the growth we will see in Canada. Not to mention the high-cost producers in OPEC that will continue to struggle even if oil prices were to recover back to $70.
Our long-standing argument for higher oil prices is based on our focus on global oil supply, and not just the US. If one is obsessed over US storage and production, we fear that the individual will miss the forest for the trees.
We believe that OPEC will extend the production cut agreement, and non-OPEC producers will agree to OPEC's terms. Non-OPEC producers in the agreement will suffer from organic production decline even if they do not participate in the deal, and Saudi understands that. So don't be fooled by Saudi's constant insistence that non-OPEC joins the production cut agreement, they are fully aware of the dire situation the non-OPEC producers are in.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.