Crunch time for OPEC ahead of Thursday meeting

No rabbits are expected out of OPEC’s hat on Thursday, when OPEC is expected to announce the reduction of the supply gut. The joint efforts of the OPEC cartel with non-OPEC producers dating back to October 2016 initially resulted to a curb of nearly 1.8 million in the first month.

Saudi Arabia, the biggest oil producer, was the first county to take the hit by complying fully with the agreed targets. The announcement that was initially agreed for 6 months brought confusion among oil traders, but the market did eventually yield to the pressure with the oil price pushing from its lower 20s all the way to early 50s.

Paradoxically enough, the clear winner so far has been OPEC’s biggest rival, the US shale oil producers, who in the meantime pumped twice as much oil in the supply compared to a
year ago. Talk about knowing a good opportunity when you see one.

Following this cat and mouse game, the crude oi price has consolidated between mid-40s to 50, with OPEC keen to push it higher. And that’s where Thursday’s OPEC meeting comes into play. Will the current production of (1.8 million b/d) be extended by another 9 months? The markets have pretty much priced the extension in but whether all members are willing to play along for another 9 months is anything but certain and that is what investors will be focusing on.

The proof of the pudding is in compliance

Even if the much-anticipated extension does get inked, it is the ability of individual members to deliver that will ultimately define the supply and most importantly the oil price. So far,
OPEC has complied by an impressive 90 percent, with Saudi Arabia and Iraq being the main contributors.

Things look tough for Iraq and UAE though. Following a poor 61 percent compliance with the target cut, Iraq managed to get back up to 90 percent in April, with a lot of uncertainty surrounding the exact production numbers as the Kurdish area of the country has yet to report their production cut since October. The UAE is another weak link in the production cut with 57 percent compliance in Q1 but over-the-top performance in April.

And of course traders need to price in the unpredictable factors of Russia and Donald Trump. Russia initially promised to comply but the markets have yet to get an update on that regard, while Trump on the other hand announced his intentions to sell half of the country strategic oil reserve on the market and also allow drilling in Alaska. If you are on the bullish side of the trade, these are the two wild card countries that will give you the clues you are looking for.

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