The Case for an OPEC Production Cut Extension in May.....

With Brent and WTI prices seemingly range bound between $50-$60 and U.S. oil inventories remaining stubbornly high, it would seem likely that OPEC will extend or deepen its historic production cut announced in December 2016. Notably, for global petroleum inventories to fall by some 300 million barrels to the five-year average, producing countries must comply 100% with the supply accord and growth in demand for crude will have to remain healthy. OPEC ministers have previously stated that oil stocks need to fall near to their five-year average for the group to say markets are becoming balanced. Recent data from the IEA showed that global petroleum inventories at the end of December 2016 had edged down to below 3 billion barrels, but were 286 million barrels above the five-year average.

The real question for market watchers is what level of compliance will OPEC members actually achieve and by how much will global inventories fall? For that, we will have to wait and see. Because of the time needed to obtain accurate inventory data, the extent of the drawdown will not yet be clear when OPEC members meet in May 2017. This would suggest that OPEC members will likely be inclined to extend the production cuts by an additional six months to ensure that the global supply glut in oil does not persist. Further, should the majority of OPEC members show compliance with the agreement by May, this would indicate effective cooperation among cartel members and will make it easier to extend the agreement. Finally, the elephant in the room that could ultimately lead to a production cut extension is the upcoming Saudi Aramco IPO (potentially worth $2 trillion). Recent reports from Saudi Arabia suggest that the kingdom is considering delaying the IPO until late-2018. Ultimately, the longer it takes Saudi Aramco to go public, the longer Saudia Arabia (OPEC's largest producer) has to support higher oil prices. Many market watchers believe that Saudi Arabia is looking for Brent prices to be north of $70 a barrel by the time Saudi Aramco launches its historic IPO.