OPEC's meeting next week could be a volatile one for the energy market, as the cartel seeks to extend its agreement to limit oil production against rising U.S. output.
OPEC is expected to extend its deal with Russia and other oil producers to keep 1.8 million barrels a day off the market, but what's not clear is for how long. Analysts say the market is positioning for a nine-month extension from the deal's current expiration in March.
So far the agreement has been seen as a factor in stabilizing the oil market, and it has helped boost prices to a two-year high. But heading into the Nov. 30 meeting, Russia's oil companies have been complaining loudly because higher crude prices have helped the U.S. shale industry ramp up production and nibble away at global market share.
Analysts expect the U.S. to add about another million barrels per day of production next year. In the past week, the U.S. produced 9.7 million barrels a day, 1 million barrels more than last year. The U.S. exported 1.5 million barrels a day.
"The Russian corporates are being so public about being unhappy about the agreement, and the markets are getting a little jittery," said Helima Croft, global head of commodity strategy at RBC. "The problem now is with the expectation that it's for the full year ... if you get anything less, it would be a negative event."
"The risks are weighted to the downside from this meeting," she said.
The meeting puts the spotlight on the changing landscape of global energy production and politics. The U.S., the third-largest crude producer behind Russia and Saudi Arabia, has increasingly influenced the market, but unlike those two countries, the U.S. industry is made up of a collection of hundreds of independent oil-producing companies, both large and small.
"One big question for [OPEC] as they head to Vienna is how vigorous will be the response of U.S. shale to these higher prices. That's a major topic of discussion," said Daniel Yergin, vice chairman of IHS Markit.
The U.S. shale industry is also a big deal in Moscow, said Chris Weafer, senior partner at Macro-Advisory.
"U.S. oil production is the elephant in the room because it's starting to surge again, and everyone is aware the cost of U.S. production is going lower and bringing more marginal barrels on to the market," Weafer said. "It's definitely in the background, particularly the [Russian] companies. They're looking very much at U.S. production because they're commercial companies and unlike the OPEC models, they have to produce results and pay dividends."
Weafer said his sources in Russia's oil industry tell him the government is working out a compromise with the industry, which may revolve around the industry escaping a new tax if it agrees to go along with production curbs for longer.
He said Gazprom Neft has publicly stated its opposition to an extension, and it is one company that could easily add more barrels to the market right away.
"The Saudis are definitely pushing for a nine-month extension. President [Vladimir] Putin said he generally supports that, but the oil companies in Russia are starting off saying they don't want any extension because it raises the price for U.S. shale. Now they are compromising but they only want a six-month extension," he said.
Weafer said if U.S. production continues to rise, Russian companies will bristle at the deal. Russian companies could add 300,000 to 400,000 barrels a day over the next several months. "We're at the latter part of this deal for sure," Weafer said. "Nobody wants to do favors for U.S. producers," he said.
Russia's companies could come to some sort of agreement in the next couple of days, and Russia will likely announce its support of the extension just ahead of the OPEC meeting, Weafer said. The production deal was first agreed to a year ago and went into effect in January.
Saudi Arabia and Russia have been the drivers of the production agreement, and neither would like to see prices so high as to draw in more shale producers or too low, which would hurt their own budgets. Brent futures were trading at just under $63 per barrel Wednesday, while West Texas Intermediate futures rose above $58 per barrel Wednesday for the first time since July 2015.
For Saudi Arabia's 31-year-old Crown Prince Mohammed bin Salman, the OPEC meeting comes at a critical time. The prince, as head of a corruption committee announced by King Salman, has rounded up and is detaining members of the royal family, business leaders and military officials. Saudi officials are demanding the captives, including 11 princes, turn over hundreds of millions of dollars, which they claim was obtained through corrupt means.
In the purge, MbS, as the prince is known, also has cemented his role as heir to his father's throne. A high oil price is necessary for the economic reforms MbS has planned, including the public offering of shares in state-owned oil company Saudi Aramco.
Croft said the Saudis are serious about keeping the oil price high but not too high. "He [MbS] does nothing by half measures, the backdrop of this OPEC meeting is his go big, or go home that we've seen in Saudi Arabia," she said. "I think they're happy to lock in the gains they have now. ... If you ever broke $70 on Brent, I could see the Aramco planners say what could we to try to cool off the rally."
In an effort to rebalance the market in the U.S., Saudi Arabia cut its exports to the market, which has had a huge inventory of crude in storage. "The Saudis have driven their exports in the U.S. to a 30-year low because they were told the U.S. is the most visible market," she said.
For Russia, Weafer said the economy is beginning to grow again and it has learned to adjust to $50 oil and it has been helped by a weak ruble. He said oil is about 40 percent of Russia's budget revenue, down from more than 50 percent before the price collapsed.
"The view from the oil companies ... is you're almost building in the next oil price collapse if U.S. oil production escalates," Weafer said. "The reason the oil price has been higher in the last few months is not because the deal is working. It's because of all the disruption in the U.S. in the oil states, in Texas in Q3" from hurricanes.
Croft said there's a cynical view that Putin is letting Russian companies complain so that he can be the hero to OPEC and his friends in Saudi Arabia. The kingdom and Russia have grown closer with Saudi Arabia announcing infrastructure deals there.
"You have a situation where it's not just Rosneft, Lukoil and Gazprom. They're adding to the uncertainty of whether Russia will co-pilot again. ... It was Putin himself that put all of 2018 out there," she said.
John Kilduff of Again Capital said it makes sense the deal could be extended just until September.
"There's an argument that the rebalancing will be really noticeable by mid-2018. At this point, they won't want to be pushing it past then," said Kilduff. OPEC probably will compromise on the timing. "The Saudis won't want to see the whole thing unravel. They'll just come into it knowing they can get an extension."