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Marina Schwarz

What exit strategy will work for OPEC?

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OPEC and Russia have started talking about exit strategy, quietly for now, but I expect we'll be hearing more about it next year. I wonder, though, is there a successful exit strategy that wouldn't affect prices? I don't really think so but who knows. For now OPEC insiders insist that it's too early to talk about but it's clearly never too early, if you want to minimize the fallout.

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I think they could pull it off. As long as they don't all come back in full force as soon as it's over. I think what you'll see is some noncompliant members upping their production little by little closer to the end of the agreement--which the market will naturally forgive--they've already set the stage for this with noncompliant Iraq. Venezuela will not have their act together by then, so this will help. I envision Saudi Arabia to be the last to ramp up, but by then demand will have slowly crept up and the market will not recoil at a slow-roll ramp up. The wildcard is Russia, who is chomping at the bit. 

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Makes perfect sense. But US shale will be rising too, with demand. Plus, I'm not ruling out more downward revisions to demand forecasts since more expensive oil = Well, let's have more renewables. Also, how patient can Saudi Arabia be? That's a really interesting question.

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(edited)

My understanding is the exit strategy is based entirely on market balance. If the market happens to balance out by June, they'll end the deal early, considering it to have accomplished what it was intended to. 

Edited by Seleskya

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20 hours ago, Seleskya said:

My understanding is the exit strategy is based entirely on market balance. If the market happens to balance out by June, they'll end the deal early, considering it to have accomplished what it was intended to. 

That's what some OPEC members are saying, but I don't think they'll do that. If OPEC learned anything from the first go-around with talks of an extension (that resulted in price drops because people were hoping for deeper cuts on rumors that it was an option), expectations need to be managed. Perhaps the conspiracy theorist in me is giving OPEC too much credit, but I think they learned that they need to drop some hints that are negative in connotation (like Russia who said it may not be on board with extending the cut through end-2018). It doesn't matter so much the decision rendered--it only matters how that compares to the decision everyone thought will be rendered. If I had to guess, I'd say this cry about how the cuts could end in June are merely a tool used to keep market expectations in check so that when they don't end in June everyone will be satisfied. 

It's like telling your kid they can stay up until 10pm when you're actually willing to let them stay up until 11pm. When they whine about 10pm, you give in and "begrudgingly" extend it to 11pm--they feel like they got more out of the deal and are satisfied. (don't take parenting advice from me).

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