FXStreet (Delhi) – Michael Hsueh, Research Analyst at Deutsche Bank, suggests that no one expects a a quota cut from the OPEC oil ministers today. Key Quotes “There are alternatives to a cut, which fall generally under the heading of verbal intervention of some flavor. Hawkish commentary costs nothing and may help to boost prices and revenues for cash-strapped OPEC member nations. However, talk alone will have little lasting effect. Possible forms of verbal intervention In order for verbal intervention to have any lasting impact it must constrain OPEC’s options and commit them to action in some set of specified future conditions. The obvious advantage of such communication is that it may trigger a meaningful reassessment of the medium term supply-demand balance without immediately sacrificing production and revenue. One possibility would be to specify a target price range. This has not occurred since the early 2000’s when OPEC targeted a price range of USD22-28/bbl which it then failed to defend even with rising quotas and production over the course of 2004. In the more recent past since 2010, the Saudi oil minister had described USD100/bbl as a “fair price for both producers and consumers,” although such talk has trailed off since mid 2014. The reinstatement of some kind of a target range to be defended both on the downside and upside, or perhaps only on the downside, is an alternative to a quota cut. A second viable alternative is to state the tighter compliance with the 30 mmb/d quota will be enforced. Key countries to be affected here are Saudi Arabia and Iraq, the two countries which have substantially raised production since the OPEC meeting in November 2014, Figure 1. A third alternative is to explicitly recognize the accession of Indonesia, which is expected at this meeting, and also hold fast to the existing 30 mmb/d quota. In effect this would lower the aggregate quota by the volume of Indonesia production which stands at 890 kb/d. Why the market does not expect a cut The market does not expect any action from OPEC for at least three very good reasons. First, OPEC should avoid taking action now which would only short-circuit the sure and steady process of supply constraint now only partway through in the US. To do so would be to forestall the desired result of the low price environment suffered thus far since November 2014 when OPEC began raising production by a cumulative 1.4 mmb/d. Second, depending on OPEC’s expectation of the pace of Fed monetary policy normalization, tightening credit conditions may be just around the corner. Third, many producer country governments have made adjustments to spending and have been affected by currency depreciation such that revised estimates of budget breakevens are now somewhat lower. Fourth, Saudi Arabia has been consistent in calling for cooperation from non-OPEC countries such as Russia, Mexico, Oman and Kazakhstan as a prerequisite for any quota reduction. Since such countries have been raising production wherever possible to maximize revenue, it seems unlikely that they will agree to share in any production cut.” For more information, read our latest forex news.