OPEC agrees to cut oil production by 1.2mn b/d

Oil prices rose by 5% on Friday 7 December 2018 after OPEC finalised an agreement to cut oil production by 1.2mn b/d, with non-OPEC allied nations, including Russia, taking a 400,000 b/d share. It was also agreed at the Vienna meeting that Iran would remain exempt from the oil quota cuts, due to current US sanctions.

Speaking after the production cut agreement was announced, Ashley Kelty, Oil and Gas Research Analyst at Cantor Fitzgerald Europe, said: ‘The supposed cut of 1.2mn b/d by OPEC+ is larger than some had expected, although still some way of what is really required to bring the market back  into balance. However, the real issue is the details of the baseline point from which the new quotas are set, given the Saudis increased production significantly last month. If it is on current production levels, then the net impact for the Saudis is in reality negligible relative to what they were producing before prices slipped from $80 highs. Consequently, it is hard to say what the long-term impact will be. Our initial snap judgement is that prices will stabilise in the $60 to $65/b range, as the cuts are likely to be insufficient to stem the near-term supply glut, given US output is continuing to  rise (albeit at a slower pace due to capacity constraints).’

Ann-Louise Hittle, Vice President, Macro Oils, at Wood Mackenzie, noted: ‘The decision is likely to be met with support from some US producers who were concerned that without a deal, WTI prices would fall further, possibly curtailing 2019 drilling activity.’

She continued: ‘A production cut of 1.2mn b/d is expected to tighten the oil market by 3Q2019 and cause prices to rise back above $70/b for Brent.’

Meanwhile, Callum MacPherson, Investec’s Head of Commodities, commented: ‘With the attention increasingly focused on the Saudi conundrum, the market (which has reacted positively so far) seems to have forgotten Iran, where the fall in oil exports accelerated last month. Today’s OPEC+ cut could put the market into a moderate deficit in 2019 when the continued fall in Iranian exports, and recent cuts announced by Canada, are taken into account. While it might take the market some time to digest this development, there is scope for an unwinding of the sell-off we have seen in recent weeks, which might see Brent returning to a 70$/b plus level.’

He continued: ‘In its November report, the IEA estimated the call on OPEC in 2019 to be 31.3mn b/d, whereas it estimated OPEC production to be 32.99mn b/d (in the month of October). This suggests a surplus of 1.69mn b/d in 2019. However, much of the Iranian production included in recent figures is not able to leave Iran (hence the drop in Iranian exports in November). When these figures are added to Canada’s recent cut announcement of around 300,000 b/d cut, the effect might be to increase the call on OPEC in 2019 to over 32mn b/d; whereas the cut announced today suggests OPEC (including adjustments for non-OPEC members) will produce somewhat less than 32mn b/d.’

‘Looking ahead to next year, all eyes will be on whether the assumed growth in US shale production, and associated pipeline capacity, materialises. If not, OPEC may need to increase production again – especially if global economic growth leads to higher oil demand than is currently expected.’