OPEC+ production cut proved though process

by: Hans van Cleef

OPEC and partners will reduce oil production with 1.2 million barrels per day (mb/d) to take effect in January, and compared to October levels (OPEC -/- 800kb/d; non-OPEC -/- 400 kb/d). Since production in November was even higher, the actual cut compared to current production levels is somewhat bigger. To come to this agreement proved to be quite a struggle. OPEC failed to come to an agreement on Thursday and cancelled the press conference. This is unusual and a sign of weakness and indecisiveness.

On Friday, OPEC was joined by ten other oil producers, represented by Russia. After an extensive meeting the oil producers decided to cut production by 1.2 mb/d, which is roughly 2.5 percent of its production per OPEC producer and two percent for non-OPEC producers (including Russia). There will be no exemptions except for Iran, Venezuela (due to sanctions) and Libya. All other countries are supposed to more or less contribute to this. A precise split-up per country was not given. This means that Saudi Arabia has the opportunity to act on unexpected developments. According to Saudi Energy Minister Al-Falih, this production cut is necessary as supply expectations changed dramatically compared to a few months ago. The minister hinted at the adjustments to the US sanctions against Iran. The OPEC+ production agreement is for an initial period of six months and will be evaluated in April 2019. Earlier this week, Canada already announced a 0.3 mb/d production cut. Although this is separate from the OPEC+ agreement, it does contribute to stabilizing the market.

As this OPEC+ production cut agreement will bring more equilibrium in the oil markets, it should also support oil prices. After many speculative long positions were closed in recent weeks, this agreement may trigger some extension of these positions again. However, with the year ultimo not being too far away, investors may decide to stay on the sidelines somewhat longer.

Although oil prices found some support on the announcement of this agreement, it was somewhat disappointing to see that prices were not able to gain significantly above levels seen earlier this week. For a large part, this comes due to the fact that the whole process was very cumbersome. This indicates how difficult it was – especially for Saudi Arabia – to meet all external and internal requests. US president Trump indicated before the OPEC meeting that the world does not need a production cut, and thus higher oil prices. Russia was cautious in committing itself to a fixed production cut as it is not willing to do more than is necessary for them. Iran preferred to get an exemption, as it is hurt by US sanctions anyway. In the end, this agreement seem to get everybody’s approval. Now all eyes shift to Washington, while we wait for a reaction on Twitter.