The Dilemma Continues: OPEC choices amid high uncertainty
OPEC is faced with a wide range of uncertainties, which are perhaps best reflected in the gulf in narratives between the bulls and the bears. For the bulls, OPEC is in a strong position: the declines in non-OPEC supply are structural while the slowdown in global economic growth is temporary. Based on this view, a mini super-cycle is just around the corner: as demand rebounds, OPEC would be operating close to its maximum sustainable capacity at times when the geopolitical backdrop may reduce spare capacity further—a perfect combination for a sustained rise in oil price. Paradoxically, many of the bulls are the ones calling for deeper OPEC cuts. For the bears, it is the other way around: non-OPEC (US shale) supply would rebound strongly in response to higher oil prices and deeper OPEC cuts and the slowdown in the global economy could persist for longer as there is no end in sight for the US-China trade war. Also, according to this view, there is enough supply held off the market and thus concerns about spare capacity are exaggerated.
The reality is likely to lie between these polar views and OPEC should resist being pushed into a corner. If either of these views does eventually materialize, the costs associated with maintaining and extending the current cuts into 2020 are low, with the potentially upside benefit that some of the views about the end of US shale growth could be put to the test. OPEC should leave part of the rebalancing to market mechanisms and resist reacting to noisy daily signals. OPEC+ is in a good position to do so especially its dominant players Saudi Arabia and Russia have succeeded in managing market expectations so far and have not infused the view that they would pursue deeper cuts and that they would do whatever it takes, at any cost, to support the oil price (interestingly, signals that the Kingdom would rebalance the market at any cost have emerged from other OPEC members, that have not been complying with their quotas, and are determined to defend prices by cutting Saudi barrels). For the first time in several years, Saudi Arabia is, so far, approaching the December meeting by not reacting to immediate market pressures and by not over-promising and hyping market expectations, which may give it the chance to over-deliver in 2020.