OPEC+ yesterday started with a 3 day Joint OPEC & NON-OPEC Ministerial Monitoring Committee (JMMC) this is important for the Crude Oil and India economy as it will determine crude prices for next three months which is one of the most important element in inflation index which results in rate policy direction for RBI who already has reduced inflation target for H2FY19.
REPORT OF DAY 1:
Saudi Oil Minister met majority of nations one to one before the start of the official meetings.
Oman minster gave the most details of the discussions going. Below are the some points he mentioned:
Nigeria and Libya, currently exempt from OPEC+ output cuts, has agreed to be part of any reductions.
OPEC discussing cut of 1Million b/d or more.
Cuts to be measured against baseline of whichever month are higher between September and October; reductions are for 6 months period from January.
Russia has agreed to reduce the oil output along the OPEC and allies in 2019.
There were certain sources mentioning that there were even discussion of going back to 2016 deal which would mean 1.6 Million b/d.
In a very surprising event : Saudi Oil Minister met Brian Hook the diplomat in charge of oil sanctions on Iran .
In a not very surprising event: USA President tweeted and trying to influence OPEC+ , below is the tweet done .
“ Hopefully OPEC will be keeping oil flows as is , not restricted. The World does not want to see , or need , higher oil prices! “
Iran Oil Minister and other country ministers did mention on this that USA should apply for OPEC membership till then they have no influence on the agreement.
Sources : Energy Intelligence,Bloomberg , HFI Research
SCHEDULE OF DAY 2 : 6th December 2018
2:30pm IST : Opening Session : All OPEC Heads & Press
3:30pm IST : Closed Session : All OPEC Heads only
5:30pm IST : Press Conference ( This might be delayed as a general trend)
SCHEDULE OF DAY 2 : 7th December 2018
2:30pm IST : Opening Session : All OPEC and Non-OPEC Heads & Press
3:30pm IST : Closed Session : All OPEC and Non-OPEC Heads only
5:30pm IST : Press Conference ( This might be delayed as a general trend)
OUTPUT CUT SCENARIOS:
Below are the various scenarios which are being speculated by various sources :
SCENARIO 1: Total Cut of 1.37- 1.49 Million b/d with OPEC+ Ex SAUDI & UAE cut 2.5% and SAUDI & UAE cut 5% since major production rise was by them.
SCENARIO 2: Total Cut of 1.23 Million b/d with OPEC Countries going back to 2016 deal which was more individual cuts.
SCENARIO 3: Total Cut of 0.89-1.07 Million b/d with OPEC countries deciding with 3% cut from Oct or Nov 2018 base.
SCENARIO 4 : Total Cut of 1.57-1.75 Million b/d with OPEC countries deciding with 3.5% cut from Oct or Nov 2018 base.
TARGET INVESTING VIEW:
The Crude prices fell from peak of $86/bbl to $60/bbl which was idle for consumer countries but we believe this is where these countries should block certain percentage of there imports for 2019 so that gives them a price certainty in volatile time.
China has already signed deal with Saudi Arabia to import 1.67 mn b/d for 2019 at current prices which is 20% of total import requirement which is 8.4 mn b/d as of now.
Our base case is the first scenario where OPEC+ Ex SAUDI & UAE will cut 2.5% and SAUDI & UAE will cut higher than 2.5% as this will make all come to an agreement. The main issue with many countries in discussion is that there production since June 2018 deal has not increase much so they are not wiling to cut as much as requested.
As seen above the production of OPEC is at compliance of 120%. The main increase has come through Saudi Arabia & UAE that justifies other countries stance that they should bear more burden of the cut than others.
Cut agreement is more important than levels as US inventories are at high but since it is going to be coldest winter season we might see crude inventories will have higher drawdown later in December and January and from April 2019 the Iran Waivers get over. And the net positions on WTI & BRENT contracts are lowest since past three years which change quickly depending on the cut amount.
IF VOLUME CUTS COME AT 1.1MN B/D -1.4MN B/D WHICH IS OUR BASE CASE THEN CRUDE PRICES CAN SEE $75-$80 WHICH BENEFIT STOCKS – ONGC & OIL AND NEGATIVE – HPCL, BPCL & IOCL
IF VOLUME CUTS COME AT 0.8 MN B/D -1MN B/D WHICH IS OUR BASE CASE THEN CRUDE PRICES CAN SEE $55-$65 WHICH BENEFIT STOCKS – HPCL, BPCL & IOCL AND NEGATIVE – ONGC & OIL