Abu Dhabi: Extension of output cuts beyond March 2018 will be in focus as Opec member countries, along with Russia, meet in Vienna on Thursday. However, the meeting is not going to be smooth and intense negotiations are expected over the duration of cuts, analysts said.
Opec countries, together with other non-Opec producers like Russia, have cut production by about 1.8 million barrels a day to prop up oil prices. The agreement came into effect in January this year and was initially set to expire in June. However, it was extended up to March 2018 to allow oil markets to rebalance. Opec members Libya and Nigeria are exempt from the deal.
“The meeting will not be a smooth affair. It is going to involve substantial negotiations because there is an indecision in terms of whether to just unequivocally extend the cuts for the rest of 2018 or whether to have a limited intervention,” Jaafar Altaie, managing director of UAE-based Manaar Energy Consulting, told Gulf News over phone.
“There is an increasing probability that they will either defer the decision completely until next meeting in three months’ time or whatever, or they will go ahead with cuts for a shorter duration than nine months. Already there is a lot of negotiation and it is likely to continue till the last minute.”
Energy ministers from Saudi Arabia and the UAE also hinted at a conference in Dubai on Tuesday that the meeting may not be easy.
“Opec meetings are never straight forward. We will debate the options and come up with a solution,” Saudi Arabia’s energy minster Khalid Al Falih told reporters in Dubai.
Oil prices fell on Monday on uncertainty over the extension of the agreement. Global benchmark Brent was down 0.35 per cent to trade at 63.39 per barrel, whereas West Texas Intermediate was down 0.45 per cent at $57.73 per barrel at 4 PM UAE time.
Russia is very concerned that the market could overheat if they just throw caution to the wind and extend until the agreement until the end of 2018.
“Russia’s stand is that bigger oil price could actually be a risk as it will encourage shale oil producers to produce more and also encourage Opec members to start cheating and increase production without complying with the deal. It will also lead to Russia increasing its own production to cash in on higher oil prices,” Altaie said.
There is also concern about domestic impact on Russia itself and how it will strengthen Rouble and appreciating rouble starts undermining competitiveness of Russian exports.
Oil is expected to remain in the range between $50 to $60 if Opec decides to extend the deal, and in case of a no deal, it will have a negative impact with oil prices going down by at least five dollars or more, according to Altaie.
Shale oil production is likely to go up as oil prices rise but to what extent the production will rise is a question mark as shale oil industry is young and is susceptible to volatility, he added.
Spencer Welch, director of London based IHS Energy told Gulf News by email that the most likely outcome is extension of existing deal to end 2018 but the biggest risk is Russia who are concerned about oil price being too high, stimulating too much US tight oil production and losing market share.
“The most likely outcome is still an extension because the risk of no deal and price drop is too high. It is likely that participants will decide to stick with what is working,” said Welch.
“Possible alternative outcomes are to delay the extension deal decision until first quarter of 2018, to assess the oil market position then. This would need an extra Opec meeting to be scheduled.”
Mihir Kapadia, the CEO and Founder of Sun Global Investments said Opec members will adhere to the cutback extension unanimously.
