Opec and the IEA last week concurred that OECD commercial stocks are closing in on the five-year moving average adopted as a proxy for market balance by participants in the Opec and non-Opec output restraint deal.
The magic number may be hit in May, the IEA said. The timing of the market reports just days ahead of this week’s joint ministerial monitoring committee (JMMC) meeting in Jeddah, and the tentative May date just a few short weeks ahead of the full ministerial meeting in Vienna, puts cutting countries on the spot.
Hitting the target can hardly be ignored, but the cuts extension runs to the end of December, so what to do?
Kuwaiti oil minister Bakhit al-Rashidi said today that the cuts will continue at least until the end of this year. And non-Opec Oman’s Mohammed bin Hamad al-Rumhy said today: “In my opinion, I think that we have not reached the steady state condition yet… To put it bluntly, the game is not over. Definitely, today is better than yesterday, but the uncertainty monkey is still on our shoulder, and it is not time to offload that.”
But others may be more impatient. And while the rolling car crash that is Venezuelan output looks likely to flatter compliance levels indefinitely, there is the risk of discipline eroding, and cuts not so much unwinding as unravelling.
Russian energy minister Alexander Novak has argued on more than one occasion for an exit strategy to be put in place, and he is right. A sudden return to the market of all of the withheld supply would clearly be counter-productive for producers. And the deal crumbling under the weight of indecision would have unpredictable market consequences, and might well sour the negotiation of a long-term alliance that is something more than a talking shop.
The JMMC’s remit is limited. And current Opec president Suhail Mohamed Faraj al-Mazrouei — oil minister of the UAE — sought to dampen expectations of the Jeddah gathering. But this was before the market reports came out. The committee participants include Saudi Arabia and Russia, whose minister has already said the scope of a future alliance will be mooted this week. What is on the agenda and what is discussed on the fringes are two different things and at least scoping the options before June is only sensible.
If the IEA stock fall projections prove correct, ministers need to leave the June meeting with an agreement that will be respected. The journey may not start quite yet, but a roadmap is required. Whether they resolve to stick with the cuts to expiry, or begin unwinding them earlier, they have to agree the methodology. On the face of it, the fairest procedure would be a pro-rata reduction of cut volumes. But some non-Opec participants may argue that they should exit first, leaving Opec members holding the fort. In past years, poorer Opec producers have argued for leniency in quota allocations. And what of any countries that are not meeting their cuts commitments? Do they go to the back of the queue for sanctioned output increases? Then there is the possibility that Saudi Arabia’s Khalid al-Falih was doing more than flying a kite when he hinted in February that the five-year moving average should be replaced as the metric.
There are nettles to be grasped and that is best done early.