Tough OPEC Meeting Looms Amid Specter of Oil Deficit

OPEC is heading for tougher-than-expected policy talks this week amid concern that its efforts to rebalance the oil market might overshoot by creating a global deficit and spurring a further price rally.

“It will not be an easy meeting and we always look at various scenarios,” UAE Energy Minister Suhail bin Mohammed al-Mazroui said on Tuesday in Dubai before leaving for the gathering of the Organization of the Petroleum Exporting Countries in Vienna, Austria, Reuters reported.

OPEC, Russia and nine other producers are cutting oil output by about 1.8 million barrels per day until March 2018, and on Thursday will discuss extending the deal. The market had largely expected OPEC to prolong cuts until the end of 2018 but doubts have emerged in the last few days.

OPEC’s leader Saudi Arabia has signaled that it wants oil to trade at about $60 per barrel, as the kingdom prepares to list shares in its national oil champion Aramco and is still fighting a large fiscal deficit.

The Russian government also wants high oil prices ahead of a presidential election in March 2018. But officials in Moscow have voiced worries about pricier oil boosting the rouble, which could undermine the competitiveness of Russia’s economy.

As oil rallied above $60 per barrel, US producers aggressively hedged their future production, raising fears of another spike in shale output in the United States, which is not participating in the global production curbs.

Goldman Sachs, one of the most active banks in commodity trading and oil producer hedging, said on Tuesday the outcome of the OPEC meeting was uncertain.

“The absence of such a consensus is due to the uncertainty on the progress of the oil market rebalancing as well as Brent oil prices trading at $63 per barrel,” the US bank said in a note.

“The push for a nine-month extension, four months before the cuts end and given an accelerating rebalancing further stands in the face of prior comments that the cuts should remain data-dependent to assess their effectiveness.”

US oil prices fell more than 1% on Monday and eased further on Tuesday from a two-year high reached last week. Goldman said oil might fall further this week, as the market had priced in a nine-month extension.

“We continue to expect a gradual ramp up in OPEC and Russian production from April onward,” Goldman said. “As a result, the announcement of an only six-month extension would still initially appear bullish relative to our expectation."