OPEC and ‘trust’ are not two words that I would put together too often. But that’s exactly what the Saudi’s and Russian’s are asking of their fellow members. Russia is not part of OPEC but the way they have been operating of late, you’d think they may as well be.
For the last 5 months, OPEC and NON OPEC members have delivered on 95% of the proposed cuts with the Saudi’s picking up the tab for those slow to reduce their production numbers. The compliance levels and trust within the group is higher than the market expected. History shows that members struggle to keep to cut quota’s. Many begin to producing more than they should. Others then follow. Hence, ‘trust’ amongst OPEC and NON OPEC is going to need to be high. All involved are going to have to believe that other players are towing the line. If a few blink and wobble, then others will likely follow.
The sell off in PoO post OPEC meeting was to be expected as the meeting delivered no ‘new’ news. The market needed deeper cuts to move to a mor ebullish $57pb range. Instead, traders departed expecting a slow drift as markets watch for supporting data over the coming weeks and months. DRAWS are now expected every week. You’d think that’s bullish, but in this market it’s already priced in. What is not priced in is huge DRAWS. The kind that makes the eyes widen. The market is in a delicate position at the moment and any ‘shock’ news on supply tightening could see PoO react very quickly. The Saudi’s in particular have shown some further intervention to prices by restricting production volumes to certain parts of the US. It’s a little trick that most are aware of but it can effect the headline numbers on EIA reports. The Saudi’s have also cut more than their share from time to time. With the Aramco IPO still very much planned for next year, they clearly have a keen interest to see PoO higher. Equally, the Russian’s are keen to see PoO support continue through to March 2018 or beyond. Putin has russian elections coming up in Mid march 2018 so it suits him perfectly. Crude will not be the only thing he’ll be reinforcing. I suspect the US will be keen to give him some of his own medicine come election time – best get your media firewalls sorted ahead of that one Mr Putin.
In summary, it’s Russia and the Saudi’s that can be trusted as they both have key interests coming up in early 2018. But as for the rest of the rabble… well, that’s anyones guess. So watch out for compliance level updates over the next few months, they are in theory just as important as the EIA reports. 5 months of 95% compliance is commendable, but 14 months of the same is hard to believe. And that’s going to keep plenty of traders guessing over the next few months and PoO is likely to bob around in the same pattern seen in the early part of the year.