markets

Speculation Grows That OPEC Will End Cuts Early as Prices Rise

  • BNP, UBS and Citigroup predict deal phase-out in second half
  • OPEC ministers say they’ll see accord through to end of year

OPEC Raises Supply Outlook for U.S. Oil

As oil trades near a three-year high and crude stockpiles fall rapidly, analysts are questioning whether the OPEC-led production cuts will last until the end of the year. As the producer group gears up for a meeting with its partners to review strategy in Muscat, Oman, this weekend, there are growing expectations that the deal will be phased out early.

The "probability is growing" that the accord may conclude before the end of the year, said Harry Tchilinguirian, BNP Paribas SA’s head of commodity strategy. Discussions around an early exit are likely to emerge at the next OPEC meeting in June, he said.

"If Brent is still trading around $60 a barrel and oil inventories are close enough to OPEC’s five-year average," the deal may be phased out informally by nations gradually weakening their compliance with production cuts, Tchilinguirian said. It would be "prudent" to expect OPEC members will start cheating given higher oil prices, said Energy Aspects Ltd.’s chief oil analyst Amrita Sen.

Other analysts predict a more formalized unwinding of the cuts.

"I don’t think the deal per se will end" as inventories near the five-year average, said Bjarne Schieldrop, chief commodity analyst at SEB AB. The Declaration of Cooperation -- the 2016 accord that first established the group of 24 oil producers-- will still stand, but be modified to allow for production cuts to gradually unwind from mid-2018, he said.

OPEC's Mission Already Accomplished

Citigroup says global oil stocks are back to average levels

Source: Citigroup

Giovanni Staunovo, commodity analyst at UBS Group AG, expects a similar outcome. Citigroup Inc., whose data show that global oil stockpiles are already back in line with the five-year average, predicts a summer agreement to ramp up production.

The oil producers themselves say they’re sticking to the plan. While Russia’s Energy Minister Alexander Novak told reporters on Jan. 12 that the meeting in Oman could include discussion of mechanisms for gradually exiting the cuts, four days later he affirmed that the pact should continue. Ministers from the United Arab Emirates, Iraq and Kuwait also insisted there’s no need to change tack.

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