Narrative twist

The narrative surrounding market rebalancing moves faster than the actual process of market rebalancing.

Last week in Moscow Russian president Vladimir Putin posited that, should an agreement be reached to extend the Opec, non-Opec deal on production levels, then it should run until the end of 2018.

There is a growing consensus that any decision cannot be made until nearer its expiry in March 2018. We’ll likely know more about timing after Opec’s end of November meeting in Vienna.

Whatever is agreed, it is clear that the narrative is already moving beyond that. A deal extended is an end to the deal delayed, and Opec recognises this. Get the exit strategy wrong — a hard Opexit, in the parlance of our times – and two years’ work could come undone very quickly.

Gunvor chief economist David Fyfe said as much today on the sidelines of the Argus Crude conference in Geneva: “Unless Opec manages to stitch together a deal… that goes a bit deeper than the cuts they have put in currently, I think there is a danger that the first half of next year we see renewed stock builds,” he said.

Opec secretary-general Mohammed Barkindo knows this. That’s why he said “some extraordinary measures may have to be taken” to keep things stable. Opec is open about trying to bring yet more producing countries into the fold – Venezuela finally seeing one of its proposals meeting with broad group approval.

And today Barkindo mentioned “reaching out” to US producers. This is shaky territory for an Opec official. It invites ridicule, and the accusation that Opec doesn’t understand how things work:  you want to talk to Opec, you can pick up the phone and call Vienna; there’s no direct dial for the US oil industry.

But that’s not the point – Opec isn’t looking to harvest some sort of agreement with an ad hoc group of US producers, it knows that is an impossibility. But it is planting the seed of an idea in the hope it germinates into an unspoken trend towards slower investment and lower rig counts.

The Opec secretary general’s call is for a shift that would indeed be an “extraordinary measure”, but un-trumpeted and undramatic, a quiet example of “whatever it takes”, to recall a phrase from earlier in this long road to rebalancing,

And Barkindo’s timing is actually pretty good. Growth in US drilling is slowing, investors are demanding returns ahead of never-ending output growth and there is doubt about the sustainability of current rates of production. Continental Resources CEO Harold Hamm thinks US producers “need something north of $50/bl for sure, and probably around $60/bl”.

Brent had a geopolitical-risk propelled run at $60/bl late last month, but hasn’t surpassed it in a couple of years. WTI hasn’t so much had a sniff at $60 in the same time.

Co-dependency borne of necessity has bought Riyadh and Moscow closer. Opec wonders if the idea that a rising tide lifts all boats may be enough to convince some in the US to start thinking along the same lines. That would be an extraordinary narrative twist.

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