The highly-anticipated OPEC meeting is taking place this week, but unlike the last few meetings, the hype and excitement is much less palpable. That is largely because the end result is thought to be a foregone conclusion.
Last week, Saudi Arabia and Russia telegraphed the events of the May 25 meeting, announcing support for a nine-month extension of the existing production cuts – 1.2 million barrels per day (mb/d) from OPEC plus 558,000 barrels per day (bpd) from a group of non-OPEC countries. With the two most important oil producers in agreement, the meeting should be quick and easy.
"The decision seems to be almost a done deal," said Bjarne Schieldrop, chief commodities analyst at SEB Markets. "There seems to be a very high harmony in the group."
But if we have learned anything from the OPEC meetings over the last several years, it is that nothing should be taken for granted. Time and again the cartel seems to surprise the markets. Saudi Arabia’s energy minister hinted over the weekend that the OPEC meeting could have more drama than many analysts currently expect.
"Everybody I talked to... expressed support and enthusiasm to join in this direction, but of course it doesn’t preempt any creative suggestions that may come about," Saudi energy minister Khalid al-Falih said at a news conference in Riyadh.
So even as a consensus has formed on one particular outcome, here are several possible “surprise scenarios” that could come out of the OPEC meeting this week, ordered by least to most bullish for oil prices.
1. No extension. This would be the most disastrous for oil prices, as OPEC abandons its collective action and returns to full production. With the oil market still suffering from oversupply, a return to higher output would cause WTI and Brent to meltdown, crashing into the $40s or quite possibly lower. However, this most extreme bearish scenario is also probably the least likely outcome.
2. 6-month extension. A rollover of the existing cuts for another six months. This had been the most widely-assumed scenario until only recently. Global inventories remain elevated, and extending the cuts through the end of the year probably won’t be enough to bring inventories back into the five-year average range. With the markets wanting more, a six-month extension would, at this point, be seen as a disappointment and would likely push oil prices down.
3. 9-month extension. Extending the cuts through the end of the first quarter of 2018 is now the market’s working assumption, and will be met with a sigh of relief. But since it has become the new baseline, a strong rally in prices is probably unlikely.
4. 9-month extension plus more countries join in. Khalid al-Falih hinted that new additions to the pact could be forthcoming. "We believe that continuation with the same level of cuts, plus eventually adding one or two small producers,” he said over the weekend. The addition of a couple marginal producers would add a little bit of a psychological punch to the agreement, but probably wouldn’t alter the supply/demand balance in any fundamental way. This outcome probably would be met with a rise in oil prices by a few dollars per barrel.
5. 9-month extension with deeper cuts. This scenario is the one to watch out for, as many analysts see the odds of much more aggressive cuts growing. An OPEC source recently told Reuters that the group was considering making deeper output reductions. "All options are open," the source said. Deeper cuts could come in several different forms. The collective output quota of 32.5 mb/d could be lowered, with country-specific limits tightened. This would be a heavy lift, but if agreed to, would lead to a much stronger price impact, immediately pushing up crude benchmarks substantially. Another way to make deeper cuts would be to remove the exemptions given to Libya and Nigeria. Both countries were not subject to any limits in the initial six-months, and both have added output and signaled more production growth in the near future. It is not clear that they would agree to limits, given their serious economic and security troubles.
OPEC has a tendency to surprise, so any of these outcomes – or others – are possible. Still, an extension of the existing cuts for nine months appears to be the most likely scenario. At the same time, OPEC has sort of backed itself into a corner – it has raised expectations to such a degree that anything less would be considered a major disappointment.