Banks Increasingly Think OPEC Will End Supply Cuts as Oil Hits $70By
Citi, JPMorgan say less intervention possible from mid-2018
Increase in crude prices is encouraging rival supply: analysts
As oil rallies to a three-year high near $70 a barrel, the view that OPEC and its partners will end their supply cuts early is spreading.
Citigroup Inc., Societe Generale SA, and JMorgan Chase & Co. predict the coalition of oil producers may begin winding down their intervention from the middle of the year, before its scheduled conclusion in December. The producers are nearing their goal of clearing an inventory glut, and rising prices risk encouraging rival supply.
Crude has climbed as output curbs by the Organization of Petroleum Exporting Countries and Russia successfully whittle away a surplus that had weighed on global markets for more than three years. The agreement will be reviewed at their next formal meeting in June.
“There could be an agreement over the summer on ramping production back up,” Ed Morse, head of commodities research at Citigroup in New York, said by phone.
For now, oil ministers are showing no signs of backpedaling. In the past week, ministers from the United Arab Emirates and Iraq have said producers remain committed to the policy to the end of 2018. Saudi Arabia and Russia, the two biggest exporters in the pact, have repeatedly stressed that when the end comes, it will be gradual.
Still, crude prices are high enough to encourage both U.S. production and action by central banks to cool inflation, which “OPEC members do not want to see,” Jeff Currie, head of commodities research at Goldman Sachs Group Inc., told Bloomberg television on Jan. 10.
Oil at $70 is bound to speed up discussions on the exit strategy, Michael Hsueh, an analyst at Deutsche Bank AG, wrote on Jan. 15.
There are still plenty of analysts who expect a more drawn-out process. Forecasts from the International Energy Agency -- the organization that advises consuming nations -- suggest that OPEC’s cuts aren’t deep enough to reduce inventories at all this year, leaving the surplus largely intact.
Bank of America Corp. predicted that it will rather be in 2019 that the cartel phases out the agreement. Emulating the approach of the U.S. Federal Reserve, OPEC will signal small monthly increases in production to taper off the curbs, the bank said.
Nonetheless, the surplus is diminishing rapidly and if it’s gone by the middle of the year OPEC “is very likely to cut short” the agreement, JPMorgan analysts Abhishek Deshpande and David Martin said in a report on Jan. 12.
“They’re very close to their goal when they meet next” in June “and they will achieve their goal in the third quarter,” said Mike Wittner, head of oil market research at Societe Generale in New York. “So the second half of the year could well be when they start” phasing out the measures.
There are increasing signs of the dangers that high prices pose for OPEC.
Fortified by new investment, U.S. crude production is set to overtake both Saudi Arabia and Russia next year, according to government forecasts. And it’s not just competition from shale as prices are high enough to finance even more expensive projects, said Citgroup’s Morse.
“They are fearful not only of the shale response, but of deep water and of oil sands from Canada,” Morse said.
— With assistance by Alex Longley