OPEC to Disappoint Oil Bulls at November Meeting, Citigroup Says

(Bloomberg) -- Oil bulls banking that OPEC and its allies will later this month agree to extend supply cuts for all of 2018 are set to be disappointed, Citigroup Inc. says.

Hedge funds are laying record bets that Brent crude futures will rise, exchange data show, amid expectations that OPEC and Russia will decide to prolong supply curbs when they meet in Vienna on Nov. 30. Markets are pricing in an extension to the end of next year, according to JPMorgan Chase & Co.

“There is an exuberance in the market about there being a done deal to extend through the end of 2018 and I think there’s likely to be disappointment in that come Nov. 30,” Ed Morse, head of commodities research at Citigroup, said by phone from New York. “Our base case is that we do not get a full-year extension on Nov. 30.”

The Organization of Petroleum Exporting Countries and Russia have been leading a 24-nation coalition of oil producers this year in an historic pact to clear a global supply glut by reducing output. The strategy is finally paying off, with about half the surplus in inventories gone and oil prices trading at the highest in two years.

The accord is due to expire at the end of March. Expectations grew that the producers will choose to extend the measures throughout 2018 after Russian President Vladimir Putin signaled in early October the country would be open to such a move.

Sequenced Decisions

Citigroup’s Morse expects that, rather than a full-year extension, OPEC will either prolong the curbs until the end of the second quarter, or postpone taking a decision until January or February.

Russian officials and companies, eager to press on with expanding production capacity, have shown resistance to an extension. Lukoil PJSC Chief Executive Officer Vagit Alekperov said on Oct. 10 that the deal should end if oil prices reach $60 a barrel, while Rosneft PJSC boss Igor Sechin has warned that U.S. shale output is undermining their efforts.

Russian Energy Minister Alexander Novak said on Nov. 2 that producers won’t necessarily decide at this month’s meeting because the outlook for the market remains unclear.

“There’s a short-term possibility of a selloff,” Citigroup’s Morse said.

Morse predicts the producers will ultimately maintain their cutbacks throughout 2018, though in a sequence of decisions rather than a commitment made this month.

Shale Surge

Bulls are still in for a let-down though, if they expect OPEC’s actions will significantly tighten global markets next year, he said. With oil prices having recovered to almost $60 a barrel in New York, U.S. shale output will surge again after losing momentum recently. There has been “an incredible amount of hedging activity by U.S. producers” for 2018 and 2019 that allows them to resume drilling, Morse said.

“It’s a fragile balance,” he said. “The higher the price goes in the short run the more difficult it will be to return the oil taken off the market.”

North American shale output will soar to 7.5 million barrels a day in 2021 as OPEC’s output cuts triggered a crude-price recovery that helped U.S. drillers, the group said in its World Oil Outlook report on Tuesday. That’s 56 percent higher than it forecast a year ago.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Dylan Griffiths, Amanda Jordan

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