Hard exit, soft exit

Author Toby Shelley

The Opec, non-Opec partnership must decide how and when to cut the knot, and since the early days of the agreement the desirability of future co-operation has been mentioned time and again.

Hard Brexit, Soft Brexit, fudged Brexit – the UK population daily endures the obfuscations and mutual denunciations of a political class unable or unwilling to formulate an exit strategy from the EU. And the mode of exit – crashing out or conscious uncoupling — may well determine the economic impact of the divorce.

The Opec, non-Opec partnership too must decide how and when to cut the knot, in the hope of walking away with more gain than pain. Russian oil minister Alexander Novak has repeatedly urged planning for a soft exit, yesterday saying it might take up to five months to unwind cuts without flooding the market.

While the EU hurtles towards a fixed Brexit date, the date for dissolution of the oil producers’ union is a moveable feast. Indeed, it has already shifted twice, extended first to full-year 2017 and then to the end of 2018. And while the trigger for dissolution of the cuts agreement is a return to five-year average stock level — itself an ever-changing number — the feast is more of a picnic in a hamper than a table booking.

Today’s IEA Oil Market Report was equivocal on the outlook for stocks. “With the surplus having shrunk so dramatically, the success of the output agreement might be close to hand. This, however, is not necessarily the case: oil price rises have come to a halt and gone into reverse, and, according to our supply/demand balance, so might the decline in oil stocks, at least in the early part of this year.”

Saudi Arabia’s oil minister Khalid al-Falih had already acknowledged the slippage last month when he said producers may “have to not only stay the course for 2018, but also consider rolling it into 2019.”

Venezuela wants the deal extended for five years. That may sound flaky but Caracas played an important part in mobilising backing for cuts in the first place, and so deserves a hearing. And, for all that Russia is portrayed as eager to cut the cuts as soon as possible, Novak’s latest pronouncements suggest acceptance that an extension may be needed: “It is possible that the target reduction in world oil reserves may occur before the end of 2018. Everything will depend on the situation on the market, on how quickly it will be balanced.”

But the outcome may be more nuanced than a further extension of current cuts.

Since the early days of the Opec, non-Opec agreement, the desirability of future co-operation has been mentioned time and again. Polite words? A cue for another annual talking shop?

Maybe not. Opec secretary general Mohammed Barkindo is a civil servant, not a policy maker. So, whilst much of his time is spent deflecting questions for which no ministerial level answer has yet been formulated, his task is also to reflect or at least hint at current thinking. So, his remarks in Cairo this week may be worthy of a second hearing. Asked if an exit strategy from cuts is already taking place, he said “the lexicon of ‘exit’ is not found in our vocabulary.” He continued: “We are all in the same boat. We have developed a bond now over the past year or two of working together, and it is in the interest of [all] of us, Opec and Russia and other non-Opec countries as well, to continue in this fashion beyond the rebalanced market … we have a common objective and that is not only to restore stability but to sustain it on a sustainable basis going forward.” He also said: “All parties, wherever I visit, ask the same question: What are you doing to ensure that this co-operation continues beyond a rebalanced market?”

Current Opec president and UAE oil minister Suhail Mohamed Faraj al-Mazrouei told Argus earlier this month “it is clear that participants of the agreement are supportive of looking at ways and means to institutionalise this important framework of co-operation.”

And Novak’s recent comments too can be read as support for something more substantial than a post break-up rendezvous: “And, as soon as we reach the targets for the world’s oil reserves, once we understand that the goal has been achieved, we will all gather together and work out a mechanism for further action.”

While a fudged Brexit might satisfy nobody, a fudged exit from output cuts might just be the best option for the oil producers.