OPEC+ announces additional production cuts

At the conclusion of the OPEC+ meeting in Vienna, Austria, on 6 December 2019, additional cuts of 500,000 b/d were announced, to be split between OPEC members (a cut of 370,000 b/d) and their non-OPEC counterparts (–130,000 b/d). This brings official OPEC+ cuts to 1.7mn b/d, from 1.2mn b/d announced in 2018.

In addition to the formal OPEC+ cuts, Saudi Arabia announced that it would continue its additional voluntary contribution, cutting a further 400,000 b/d. Several other countries, including the United Arab Emirates (UAE) (–60,000 b/d), Kuwait (–55,000 b/d) and Russia (–70,000b/d), also pledged large quota reductions, raising total unofficial OPEC+ cuts to 2.1mn b/d. 

Commenting on the announcement, Bank of America (BoA) Global Research said that compliance with production cuts had thus far ‘been solid, owing to Saudi Arabia’, but the latest target levels ‘may be harder to meet’. It noted: ‘The agreement will reduce quotas further for several OPEC+ participants that were unable to deliver on previous quotas, casting doubt over compliance levels in 2020.’ It also pointed out that: ‘Iraq remains a key focal point for OPEC+ critics. In 2019, Iraqi production has averaged more than 200,000 b/d above its previously agreed quota levels, and today's agreement reduces their quota by an additional 50,000 b/d. Based on historical precedent, we remain skeptical that countries like Iraq will deliver on their cuts.’

Meanwhile, Callum MacPherson, Investec’s Head of Commodities, suggests the announced cuts might be ‘a lot less exciting then they seem’. He said: ‘The 500,000 b/d cut looks impressive given that expectations were low in the lead up to the meeting, but it is a lot less exciting than it seems even with Saudi’s voluntary 400,00 b/d cut.’ He continued: ‘Assuming the changes in the treatment of a portion of its production known as “condensate” mean that Russian output won’t change, then overall, the effect of the new cuts is probably to reduce output by under 300,000 b/d. This is about the same amount as Iraq needs to cut by to comply with new and previously agreed cuts. Note, Iraq has said it will comply this time – we shall see.’

MacPherson also noted: ‘Even if compliance is strong and oil demand grows by 1.2mn b/d next year, these cuts may only leave room for supply from other countries to grow by 1.5mn b/d, which is at the lower end of forecasts. Therefore, Brent may need to move below $60/b to avoid stimulating too much demand growth.’