Don't be fooled by the apparent dithering of OPEC and friends over whether to extend their output restraint when they meet at the end of the month. They know full well that failing to send a clear signal would send oil prices plummeting.
The apparent backsliding from Russia and a small number of OPEC members may be a belated attempt to create a sense of uncertainty ahead of the gathering. The extension will then have a much more positive impact than if it merely ratified a long-flagged intention. Just look at what happened last time they all met, back in May:
The decision to extend the cuts to the end of March 2018 was a foregone conclusion. Every ministerial interview said so. When that decision came, the market duly reacted: Brent fell by $2.50 a barrel amid disappointment that OPEC and the others hadn't done even more. They don't want a repeat.
Last month, I warned that the participating countries mustn't dither and kick a decision down the road. Perhaps the second worst thing would be flagging the decision so clearly that it can only disappoint. The latest suggestions of dissent may just be an attempt to avoid that.
Perhaps some comments have been interpreted more definitively than speakers intended. Vladimir Putin's support last month for extending cuts to the end of 2018 was prefaced by a reminder that November was too soon to decide. But the qualification has been all but lost.
OPEC and friends have lost control of the narrative and attempts to sow uncertainty have come too late to manage expectations. Speculative long positions in Brent crude are just shy of 600 million barrels, suggesting a nine-month extension has already been fully priced in. If an extension isn't announced, the impact on prices as these positions are unwound would be ugly from the producers' perspective.
If the Vienna group hopes uncertainty will discourage U.S. shale producers from locking in prices for next year, they're likely to be disappointed. They've left it too late to influence the Americans' 2018 strategies, which were largely put in place just as crude hit $65 a barrel. The net short position of swaps dealers on the Nymex crude market -- a proxy for the hedging activity of shale producers -- has widened to more than 525 million barrels, suggesting that hedging activity has accelerated in the past couple of weeks.
Is there a real prospect of Russia throwing a spanner into OPEC's works? I don't think so.
Citigroup published a research note on Russian oil last week saying, among other things, that "the math is indicating Russia should let the OPEC+ agreement expire", with higher production more than offsetting the lower prices that would result.
While Citi makes an economic case, it doesn't address the political implications for President Putin of leaving his new friends in the lurch. As I argued here, backing away from an extension could endanger the arms and investment deals signed during the Saudi king’s visit to Moscow and weaken Russia’s burgeoning influence in the Middle East. That doesn't seem a good trade-off. When push comes to shove, the world’s biggest energy exporter will back a deal.
Sure, we've been blindsided by OPEC before. But Saudi oil minister Khalid Al-Falih has said he wants a clear decision on Nov. 30, including "an extension of some sort". He believes Russia will be on board. Opposition to announcing an extension on that date may show the group's unity is under strain, but it's not a good idea to bet against a Saudi oil minister when he's that explicit.
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