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Opec can only disappoint the market

Many cutters are now sceptical of the need to keep cutting and a watered-down deal will be followed by weaker compliance in 2018 anyway

Opec and its partners will announce an extension of their cuts on 30 November, but that's about as much that can be said. The deal is not done and lacks consensus on the duration of the extension. The main reason one will be agreed is fearfear that the market's reaction to anything less will be punishing.

Bears will find reasons to sell anyway. Expect the deal announced tomorrow to be a watered-down version of the current one. It might include provisions to allow countries to produce more oil at certain prices, or call for a reassessment in the spring; Saudi Arabia might succeed in its aim of bringing Libya and Nigeria back into the quota system, but Libya, at least, intends to resist this; and it's increasingly likely that the extension will be shorter than the nine months (to end-2018) that many in the market expect. The chances of a collapse in the deal have faded. But don't underestimate Opec's ability to inadvertently cough up some bearish small print in its communiqué.

Why do many in the market expect a nine-month extension? Because Opec and especially Saudi Arabia spent recent months signalling that one is likely. Headlines in October suggesting that Russia's President Putin was on board helped toothough Opec's ruler-in-absentia was clear when he said his country would decide based on the state of the market in March 2018.

Only late in the day, in the past few weeks, have senior Gulf Opec sources started acknowledging in private that the full-2018 extension is now problematic. Off the record, some cited unusual resistance even from Algeria, one of the architects of last year's deal. Qatar, hardly disposed to the Saudi position at present, was sceptical at the outset last year. Some Kuwaitis fear the rising price imperils domestic reform efforts. Iran and Iraq have been publicly supportive and privately resistant. Now the secret is out-the deal, if it happens, will be forced through, not lapped upand some sources are trying to lower expectations.

Difficult data

Opec's own data haven't helped Saudi Arabia's cause. The most recent monthly market report predicted that the call on Opec's oil next year will be 33.4m barrels a dayalmost 0.5m b/d more than in 2017 and 1m b/d more than the International Energy Agency predicts.

The discrepancy between the IEA's and Opec's numbers was baffling (especially to the IEA). Its origins are in Opec's much more muted expectation of non-Opec supply in 2018 (a rise of 0.87m versus the IEA's 1.4m b/d). Opec has repeatedly underestimated the growth of American tight oil and seems to be making the same mistake.

It makes it hard for Saudi Arabia to convince sceptical members that another year of restraint is necessary when Opec's own numbers claim demand for their crude will be much higher. Even among Saudi advisors, there is some concern about whether the price might now rise too high, to a level that starts to reactivate investment in long-term, low-marginal-cost developments like the Canadian oil sands and deep-water offshore.

Venezuela makes the immediate debate even more difficult. Its plunging output means the country's "cuts" are now 70,000 b/d deeper than it pledged. Production has fallen by 0.5m b/d in the past two years. The debt crisis and prospect of defaultand recent appointment of a general, Manuel Quevedo, to run the oil ministry and state company PdVare grim markers for what is in store. If Venezuela's output in 2018 falls as steeply as some analysts expect , losing up to 0.6m b/d, the rest of Opec will have an even bigger gap to fill.

Whatever is agreed, compliance with voluntary cuts in 2018 will be worse than in 2017 too. Last year's deal was supposed to be temporary, not an adoption of perma-cuts. Producers can argue that the special measures have done their job and further action will risk dangerous price appreciation. Demand is up and stocks are falling (the surplus to the OECD five-year average is now down to around 140m barrels, about 200m barrels less than in January), yet prices above $60 could undo the good work. Several cutters-Russia, Iraq and Iran, especially-have plausible upstream growth plans in mind for 2018. All this bodes badly for group discipline in 2018.

Moscow calling

Russia's ambivalence about an extension has been Opec's biggest problem. The country's producers were opposed to the cuts from the start and throughout 2017 have been busily drilling to increase capacity. They may have up to 0.65m b/d of supply waiting to come on stream, according to Credit Suisse. They also fear further price appreciation: it would boost US tight oil supply, argues Rosneft boss Igor Sechin; and it would also increase Russian producers' tax liability. Russia's finance ministry believes the cuts have now hurt GDP and frets that an oil-price rally could lift the value of the ruble.

The Kremlin's position is differentat least until Putin is re-elected in March. Higher oil prices bring more revenue for the treasury. The best bet might expect Russia to keep pledging to cut at least until the spring, sustaining the oil price until the political consequences of a price fall are less severe and producers can be let off the leash as a reward for their loyalty.

Either way, Russia is plainly now the group's deal-maker. Once agreement is struck among the Opec ministers around the horseshoe table in Helferstorferstraße on Thursday, Saudi oil minister Khalid al-Falih will need to run it by Russia for his approval. In November 2016, Falih left the meeting room to phone Russian energy minister Alexander Novak, and the deal only proceeded once the main boss, in the Kremlin, had authorised it. For all the attention on the Austrian capital this week, Moscow is where Opec policy is decided these days, not Vienna.

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