OPEC’s meeting, potential extention of the agreement. Additional cut still on the table

Led by the Organization of Petroleum Exporting Countries (OPEC), 21 nations have been trying to reduce crude production by almost 1.7 million barrels a day since November 2016 and have achieved an average compliance rate of 96%.

On May 25th, OPEC will meet in Vienna to decide whether to extend the initial production cut agreement. During the First half of May, the West Texas Intermediary (WTI) fell near USD 45 after data showed U.S. output raising for 11 straight weeks and US crude oil rig counts experiencing a 35% increase since the beginning of the year to reach 712 rigs mid-May. Following this steep drop in price, OPEC nations and Russia reassured the markets several times that the agreement will be extended another 9 months and that additional cut are still on the table. However, Nigeria and Libya, two OPEC nations exempt from the deal, are restoring output which may disrupt production goals; Libya increased its production to more than 700, 000 barrels a day at the beginning of May after crude started flowing again from two fields that restarted in April. After reaching a 30 year low of 1.39 million barrels a day in August 2016, Nigeria is planning to increase production again, boosted by the scheduled restart of the Forcados pipeline. Another risk to the OPEC deal is the fact that the curb of Iraqi oil output was made possible by executing several wells maintenances earlier than planned, a technique that will be impossible to replicate if the agreement were to be extended.

On the other hand, decreasing US inventories of almost 12 Million barrels since mid-April as well as harsh weather expectation during summer in the OPEC region, could counter balance these risks and help OPEC achieve its objectives, triggering a rebound of the oil price to stabilize within a USD 50-55 range for the next 9 months.

Overall, the Energy sector is up 0.85% MTD and outperforms the MSCI world Index by 22 bps led by a strong performance of European Energy stocks. Despite a volatile barrel environment, OPEC should be able to reach its production targets for the next nine months.

Pierre Melki – Equity Analyst Global Equity Research, Energy & Utilities – Union Bancaire Privée (UBP)