OPEC: An Extension and a Start to Exit Strategy

Published on November 29, 2017

The dramatic fanfare surrounding the arrival of Russian energy Minister Alexander Novak to Vienna this morning was a stark illustration of Russian dominance in the leadership of the 24 OPEC and non-OPEC oil producers gathering for the annual OPEC Ministerial meeting. 

** Novak is said to be bringing with him a compromise proposal, strongly endorsed by Russian President Vladimir Putin, to couple the Saudi-proposed nine-month extension of oil output cuts from March 2018 to year-end with a Russian-sought “review,” probably in June next year, to assess the state of the “rebalancing” in the crude oil market. 

** In effect, OPEC-plus seems highly likely to agree to a certain three-month extension in the current output cuts agreement from March next year, with the remaining six months dependent on the developments in oil prices. If needed, the current output cuts could be extended for the remaining six months to underpin “stable” oil prices around an equilibrium deemed for now to be around $60.

** But if prices rise too high too quickly, we understand the oil ministers are starting work on a new mechanism or “exit strategy” in which there would be a “reverse tapering” or laddering up of output shared among the 24 participating oil producing countries.

** This work on an exit strategy is perhaps the most important new development that could emerge in the talks. To avoid the trampling of oil prices if, or when, the OPEC output cuts fall apart against the backdrop of steadily rising prices, the idea is for an equally coordinated “reverse taper” or scaling up of oil output increases over a set period.  

** Much more work will need to be done on how exactly coordinated increases in output would be divvied up among participating states. Perhaps just as importantly, borrowing from the forward policy guidance of the Federal Reserve and the major central banks, the OPEC leadership will be looking at how best to signal their messaging to sway the trading in the crude futures markets.  

** And a key element for any progress on an OPEC exit strategy will be a Saudi willingness to be “first in/last out” in revised quotas, meaning its increase in oil output would come last behind the small increases by the other oil producers, and perhaps to no higher than 10.2 million bpd, or below its 10.8 million bod baseline at the end of last year.

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