Goldman Bets Against OPEC, But What If the Cartel Over-Delivers?

(Bloomberg) -- The oil market has already priced in a successful OPEC-Russia deal to extend production cuts by nine months. If you listen to traders and hedge funds, that means price risk is now clearly skewed to the downside: the best the cartel can hope to do on Thursday is meet expectations. 

Both Citigroup Inc. and Goldman Sachs Group Inc. told investors to prepare for disappointment and a drop in oil prices. They may be underestimating the Organization of Petroleum Exporting Countries' capacity for surprise.

The group surprised almost everyone when it forged a preliminary deal to cut production at a meeting in Algiers in September 2016. It did so again a year ago in Vienna, when Russia and several other non-members joined the agreement.

The cartel and its allies still have some levers to pull that would allow them to claim, at least on paper, that they've exceeded expectations again.

First, several new non-OPEC countries including Turkmenistan, Republic of Congo, Chad and Bolivia will come to Vienna in addition to the 10 non-members already participating in the cuts. Adding just a few of those nations could allow them to bump up the total supply reduction of 1.8 million barrels a day, even if they're just counting natural declines at aging fields that would have happened regardless.

Another positive-sounding surprise could come from within OPEC's own ranks. Libya and Nigeria were exempt from cutting a year ago due to internal strife. If Saudi Arabia manages to convince both to accept a limit, it may not result in an actual reduction in supply, but could at least reassure markets that the African nations wouldn't be able to increase production significantly next year.

Third, OPEC and Russia may move the goal posts. Why agree to a nine-month extension when you can arrange a yearlong roll-over. How? Just re-set the deal start in to January instead of April. The final effect is the same -- the cuts get extended to the end of next year -- but for at least a few brief moments 12 months would sound better than nine.

Short of anything more substantial, there's always the Saudi-Russia bromance as a final fall-back. Energy ministers Alexander Novak and Khalid Al-Falih could put on a good show during OPEC's final press conference, showing the market their cooperation is closer than many hedge funds and oil traders think.

To contact the reporter on this story: Javier Blas in Vienna at jblas3@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Alex Devine

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