Citigroup predicts that companies planning to profit off of an OPEC deal extension next month are setting themselves up to be disappointed.
So far, most hedge funds bet that Brent futures will rise as a result of an agreement extension that will extend 1.2 million barrels per day worth of cuts through 2018. The bloc’s November 30th meeting in Vienna may not deliver its public promises though, the bank says.
“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 of Citigroup told Bloomberg from New York. “Our base case is that we do not get a full-year extension on Nov. 30.”
So far, OPEC’s strategy has paid off. Over one-half of the surplus that caused the initial price crash has disappeared since the beginning of the year. Oil prices are in the $60 range, which is the highest point in over two years.
The deal limiting output is due to expire in March 2018, which means that the duration of the effect of the deal may be limited. Russia, a non-OPEC contributor to supply cuts, said it would be open to extending its 300,000 bpd cuts, which are enacted in addition to the bloc’s reduction scheme.
“It’s a fragile balance,” Morse said. “The higher the price goes in the short run the more difficult it will be to return the oil taken off the market.”
If the cartel wants to target a higher price (which it won’t officially communicate to the market), it will likely trigger a new wave of U.S. shale production next year. More importantly, that higher oil price target may meet the resistance of Russia—the leader of the non-OPEC group of producers’ pact—which is now generally viewed as steering the OPEC/non-OPEC oil production policy, together with OPEC kingpin Saudi Arabia.