OPEC will see an incomplete job when it meets on 25 May and so be likely to extend the existing 2016-agreed deal to reduce levels of production. This is the view of US-based investment firm PIMCO.
As the Organization of the Petroleum Exporting Countries remains highly relevant, this matters to the world and its economy. OPEC is not the fearsome beast it was in the 1970s and 1980s when its product was mostly the only game in town.
But for all the attention paid to changes in US shale output, OPEC can swing oil balances more in a single month than US shale can in a year, says Greg Sharenow, a portfolio manager at PIMCO.
Rewinding to 2016
- oil market hit an inflection point in the summer
- declining non-OPEC output and strong demand signalled rebalancing
- fourth-quarter surge in OPEC output looked set to delay rebalancing by another year
- last-minute negotiations led to an agreement to curtail output
- this accelerated drawdown of surplus inventories in 2017
“While this deal has reignited non-OPEC investment, we expect OPEC to maintain discipline through year-end 2017, allowing inventories to continue to normalise,” comments Sharenow.
He believes the main risk is that OPEC fails to renew the deal and increases output just as the supplies resulting from short-cycle (primarily shale) investment in the US begin to accelerate.
Reuters reports that an OPEC panel taking place this week to review scenarios for next week's policy setter meeting is looking at the option of deepening and extending the deal.
If OPEC extends the deal as PIMCO expects, the price of benchmark Brent could average in the mid-$50s in 2017 and 2018. PIMCO says it could revise its price view higher should production costs begin to rise at a faster rate than producers can improve efficiency.