Will Current OPEC Deal Survive?

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On the one hand. given the tightness in the market and the fact that the inventories have reached the 5 year average that they had set as goal post. then that should technical call for them to call-off the deal. the US JP Morgan bank said in its report obtained by Trend.

“However. on the other hand. looking at our balances it seems the tightness in the market disappears in 4Q2018 and all the way into 2019 when markets could potential go back into surplus if they were to pull out of the deal which should call for them to stay in it a bit longer.“ said the report.

For the OPEC members that can bring back modest additional supply. to be prudent the JP Morgan analysts have assumed Saudi Arabia. UAE. Kuwait. Iraq and Qatar. Algeria and Ecuador to return the 4.5 percent cuts to baseline production established in Dec 2016 as JP Morgan finds it difficult how the deal can realistically survive beyond December OPEC meeting once the real impact of Iran sanctions is clear.

“However OPEC and non-OPEC members are likely to bring back oil well ahead of that as usually collapse of a deal will never be officially confirmed. Even the easing of output cuts is a rare event and not happened that often in the past and getting OPEC members to increase output and not expecting the deal to technically end will be counter intuitive.“

The report says that Iran is a lynch pin in this deal and given the re-imposition of the US sanctions on Iran. it will be difficult to expect Iran to cooperate if OPEC was to make decisions on releasing extra barrels without taking them into consideration.

“In addition to that. we think the US will be the wild card in the run up to the OPEC meeting and immediately after that. President Trump. who has commented few times on OPEC artificially bumping up the prices. could decide to take action by releasing SPR barrels in order to offset the tightness in the market. This is likely to complicate the decision making process for OPEC.“ said JP Morgan.

For the whole of OPEC though. the increases from oil producing countries including Saudi Arabia. Kuwait. UAE. Iraq. Qatar will offset most but not all of the declines from Iran and Venezuela in 2018 and 2019 especially if Venezuela was to continue declining at current pace all the way into 2019. according to the report.

That would reduce the spare capacity of the 5 Middle East oil producers to 2.56 million barrels per day in 2019 from 3.5 million barrels per day in 2018.

In December 2016. at a meeting of oil producers in Vienna. 11 non-OPEC member countries agreed to cut oil production by a total of 558.000 barrels a day. The agreement was concluded for the first half of 2017 and was extended until the end of the first quarter of 2018 at a meeting on May 25. 2017.

At the last OPEC meeting in Vienna. the agreement was again extended until the end of 2018. Azerbaijan supported the decision.