What To Expect From The OPEC Meeting (And What Not To Expect)

Recently, OPEC meetings have not been what they used to be. The most obvious difference to most investors is that the twice-yearly gatherings no longer garner the kind of breathless, fearful coverage that was once commonplace. There are other differences too, not least the fact that they are no longer restricted to just cartel members. A small group of other countries with state owned and run oil operations, most notably Russia, are also invited.

The resulting group has become known as OPEC+, and when they meet, there seems to be only one thing that the world is watching for: Will they continue, or extend, existing output limits on crude oil?

That question is complicated this time around by several factors.

The meeting, which begins in Vienna tomorrow will be the first attended by the new Saudi Oil Minister, Prince Abdulaziz Bin Salman, the son of the Saudi ruler, King Salman. He took over in December when Khalid Al-Falih was removed from the position, but it remains to be seen what the reasoning behind the move was. It could be just good old-fashioned Saudi nepotism, but with the upcoming IPO of the state oil company Saudi Aramco, it could also mark a change in strategy from OPEC’s biggest producer and most influential member.

Only a tiny fraction (0.5%) of Saudi Aramco is being offered to the public, but the pricing, demand and subsequent performance of the shares will create a public value for the company, so is extremely important to the Saudis. There is some debate as to how they will approach this meeting in the context of the IPO.

They could work to extend the existing deal to prop up prices in the short-term or abandon it to increase their market share. Most analysts, and the market based on the last few days price action, assume that it will be the former. The current pricing, with Brent just above $60 and WTI just below, is a kind of Goldilocks level for Saudi Arabia and probably the rest of OPEC too.

It is high enough for them to generate significant cash flow given their low lifting costs, but just low enough to put the squeeze on some U.S. shale producers. U.S energy stocks are down around forty percent this year, even as the market as a whole has hit record highs.  WTI in the $50s just doesn’t cut it for American E&P companies that have borrowed extensively to expand their output. There are already signs that output growth is slowing here as a result, and if that trend continues, it will suit OPEC+ just fine.

Internal strife in both Iran and Iraq will also be on the agenda, although there is not much that the other countries can do about that. A slight relaxation in the quotas for both might help a little and wouldn’t come as a major surprise, but the effects would be limited. Cynically, one wonders if the other OPEC+ members would want to do that, though. Disruption in one or both of those countries would push prices higher without anybody else reducing output and/or would actually allow for some production increases elsewhere to offset losses.

All in all, the most likely outcome of the two-day meeting is ... nothing much. An extension to the duration of the current round of cuts is possible, but major changes look unlikely. There are short-term considerations that would make pushing prices higher seem desirable, but the same effect can probably be achieved over time by doing nothing, with the added bonus of slowing the U.S. shale boom considerably.

For stock investors, the biggest potential impact would be if this meeting does result in some attempt to prop up prices. Regardless of the real reason, the most likely public explanation for that would be some serious worries about global growth, and a restatement of those concerns along with the prospect of higher energy costs could retrigger the selling that has marked the beginning of this week.

Given that that is unlikely though, as strange as it feels for an old guy like me to say this, tomorrow’s OPEC meeting should be of little concern to investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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