OPEC: cut or not to cut, hamletic doubt in Vienna’s meeting

OPEC is meeting in Vienna to discuss rolling over its six-month deal with 11 other exporters to remove 1.8 million barrels a day from the oil market in order to shrink global crude stockpiles. Consensus has formed in recent weeks around a nine-month extension, along the lines of a plan agreed to last week bySaudi Arabia and Russia.

Most analysts expect the cartel to extend production cuts for another six to nine months following recent statements from major oil players.

Moreover, Saudi energy minister Khalid al-Falih said in a joint news conference with his Iraqi counterpart, Jabar Ali al-Luaibi, on Monday that Iraq gave the "green light" to a proposal for extending cuts for nine months, according to Reuters. And that's notable given that Iraq was one of the main obstacles to OPEC reaching an agreement on production cuts back in 2016.

"For now, several factors are keeping OPEC and non-OPEC countries in market management mode. The policy has given OPEC countries roughly at 10% bump in revenues compared to a scenario where output remained high at 4Q16 levels," Barclays' Michael Cohen and Warren Russell wrote in a report to clients.

"But the longer that OPEC engages in such market management, the more concerned market participants will become about the eventual end of the agreement," they continued. "Thus, we believe OPEC needs to articulate an exit strategy."

As of April, Baghdad had still not achieved its promised output reductions of 210,000 barrels a day from the October reference level, according to figures in OPEC's monthly report. Earlier this week, Luaibi said Iraq was now producing at its quota.

There are three possible outcomes from the meeting.

The most likely is simply to extend the expiry date of the cuts, from the end of June, by either six or nine months.

There is also a chance the deal could be extended and the cuts deepened, but that is far less likely, around a 10 per cent chance according to market analysts.

Then there is the collapse in talks, "no extension" option, the one Saudi Arabia will doing its best to avoid.

Already the short term price is converging with the long term price, which has made this meeting the fulcrum of the immediate future of oil's fortunes.

No extension to the deal to the deal would see the spot price tank, falling probably around $US5-to-$US10 barrel, creating what the technical chartists, who watch this sort thing, call a "death cross"'. As the name suggests, this would be very bad news for producers and by extension, good news for motorists.

Extending the current deal has, to a large part, been priced in. It would most likely see a modest relief rally in prices, or minor grief rally for motorists and other consumers.

Extending the deal, and cutting deeper into production, could see prices bounce back up from the long term trend – the "golden cross" scenario – perhaps gaining around 10 per cent, or $US5 a barrel.

The OPEC side of the bargain is already under pressure with Libyan production up more than 60 per cent since the deal was struck, delivering an extra 320,000 b/d, while repairs to a sabotaged Nigeran pipeline could flood an additional 200,000 b/d onto the market.

The non-OPEC nations, marshalled by Russia – which produces even more oil than the Saudis – were supposed to deliver cuts of around 400,000 b/d.