By: Noha El Nahhas

Mubasher: The Organization of Petroleum Exporting Countries (OPEC) is heading for a tough fork in the road as it is scheduled to meet later on Thursday to discuss extending its agreement to trim production by 1.8 million barrels per day.

The upcoming OPEC decision will be a tough one, analysts and economists have said.

While the output cut decision was welcomed that beginning, news reports have arisen indicating that this might not be the case for the upcoming meeting, as Russia, which is the largest non-OPEC producer is less enthusiastic about an extension, citing a hindrance to its economic growth.

Similarly, cut-favouring OPEC members have varied in terms of the length of the extension with some favouring a six-month extension, while others considering an extension of the deal till the end of 2018.

The current OPEC agreement ends by the end of March 2018.

9-month extension

The nine-month extension deal appears to be the most highly anticipated by investors as it will help keep crude price higher for a longer period.

Last week, Russia and Saudi Arabia announced signing a deal to extend the cut for another nine months, while news reports said that Saudi Arabia was pressure OPEC ministers to extend the output cut till the end of next year.

Sources inside OPEC have also said that the nine-month extension is the most likely scenario, indicating that the agreement made in November may be reviewed again in June.

OPEC members see an extension under nine-months as harmful to oil prices, which will likely decline if such a decision is taken.

Iraq’s oil minister on Wednesday confirmed his call for an extension, noting that the deal would not require a mid-term review.

"We are happy with $60, maybe a little bit more than $60, but we have to be careful about the effect on the other side of the river," CNBC reported on Wednesday, citing Jabar al-Luaibi as saying..

Analysts polled by Bloomberg News forecast a nine-month extension to the OPEC deal.

 

6-month extension

This six-month extension is the scenario most likely to be favoured by Russia, although it may prompt a decline in oil prices.

Russia’s domestic policy will likely be the biggest challenge to reaching the extension agreement, according to Citi, which cites Russian central bank worries that a rise in oil prices may prompt the Russian ruble to increase in value, which in turn would negatively affect the largest non-OPEC producer’s economic growth.

"Our expectation is that something short of a nine-month extension is delivered, likely either a shorter extension or a deferral of the decision until" the first quarter of 2018, Citi analysts wrote in a research note on Tuesday..

“If Citi's call is correct, it expects traders to liquidate their crude positions, leading to a sell-off likely to exceed the $3 per barrel swing in May when OPEC's last meeting disappointed the market,” CNBC reported in a comment on Citi’s forecast.

Worst case scenario

The third, final, and worst case scenario is if no agreement regarding the extension is reached during the Thursday meeting, which means that the deal would end by the end of March 2018.

In July, Russian media reported that the country was in favour of an extended production cut but believed that further supply reductions may send a wrong market message.

 

Translated and edited by: Nada Adel Sobhi