Will OPEC exit hard from supply deal or ease out of curbs?

The Organization of Petroleum Exporting Countries (OPEC) begins its 174th conference meeting in Vienna today, and the focus will remain on the group’s decision regarding its exit strategy from the output-cut deal it had agreed to in 2016.

OPEC’s non-member allies in the agreement will join the discussions on Saturday.

In December 2016, OPEC and other major producers led by Russia had agreed to slash crude supply by 1.8 million barrels per day (bpd) in an effort to shore up prices and rebalance global oil market.

Since the deal came into effect, starting January last year, oil prices have climbed steadily from nearly $50 per barrel (bbl) to the recent $75/bbl-level.

The output-cut deal has been extended twice since it was first implemented and now expires at the end of this year.

Argaam takes a look at three policy moves that OPEC may consider to exit the deal:

1)  Complete increase

OPEC+ oil producers can choose to end the output agreement after it expires in December, potentially bringing back the 1.8 million bpd that has been curbed under the deal.

“Such a decision could be based on a rational discussion of what OPEC+ has accomplished and the group’s responsibility for ensuring markets remain balanced,” according to Ehsan Khoman, head of research at MUFG.

“There are, however, significant barriers to this,” he added.

This option could possibly trigger the battle for market share, after nearly two years of lull following the 2016 agreements.

“It would be a bearish signal to the market and prices could fall significantly,” Khoman said.

2) Gradual increase

Saudi Arabia is said to have put forward a number of plans to its fellow OPEC members, including one with a two-step increase that will allow an immediate increase of 500,000 bpd and an equal hike in December.

“There is a possibility that Saudi Arabia and Russia adopt a measured and gradual approach to raising production by announcing a 500,000 bpd increase from July 2018. To prevent any unnecessary shocks to oil markets, there may be little detail provided on the next hike,” Lukman Otunuga, research analyst at FXTM, told Argaam.

A gradual increase in output may stimulate oversupply concerns, consequently sending oil prices lower, he added.

3) Reserve decision

OPEC+ could also choose to hold their cards close and retain their flexibility to assess the market conditions in November 2018, before committing to any increases.

In this case, the group could roll over the current production cuts to the end of 2018 or implement a fractional increase in output to gauge market reaction.

“With Saudi Arabia and Russia pushing for output increases, this outcome seems unlikely. However, if such a development becomes a reality, oil prices are likely to rally higher amid prospects of less supply in the global market,” Otunuga said.

Japanese bank MUFG expects oil prices to climb by $5 to $10 a barrel in Q3 2018, in this case.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com