Deeper OPEC cuts to tip oil market into deficit
BAKU, Azerbaijan, Dec.7
By Leman Zeynalova – Trend:
Deeper cuts of oil production by OPEC will tip the oil market into deficit, Trend reports citing UK-based Capital Economics research and consulting company.
“OPEC+ has announced that it will deepen its oil output cut by 0.5m bpd to 1.7m. More surprising, is that it looks as though Saudi Arabia will cut supply by a further 167,000, despite the fact that it is already producing well below quota. This could tip the oil market into deficit and help to support prices,” said the company it its report.
After lengthy discussion – which suggests a lack of agreement amongst member states – OPEC+ announced that it is going to withhold an additional 0.5m bpd of supply until end-March. OPEC members will cut by around 0.36m bpd, and the allies will cut by 0.14m.
“OPEC’s current under-production means that output would only need to fall a touch to meet the new quota. OPEC was already producing below its quota by nearly 0.3m bpd in October. As such, the group would only need to reduce output by less than 100,000 bpd to be compliant,” said Capital Economics.
Nevertheless, OPEC output is now set to decline further in the coming months. “Saudi Arabia has pledged to cut by an additional 167,000 bpd on top of the 400,000 “voluntary cuts” it has already made. (OPEC’s under-production is solely because Saudi Arabia has been supplying 0.4m bpd less than its quota.) Saudi energy minister has pledged that the “voluntary cuts” would be maintained if other OPEC members comply with their quotas. This caveat is key as compliance has hitherto been poor. “
What’s more, OPEC’s allies (as a group) have been producing close to quota so the latest pledge to cut should remove close to 150,000 bpd of supply. However, individual compliance by the allies has also been poor, with Russia over-producing for much of 2019. It reportedly produced at its quota in November but, on past form, it is hard to be convinced of future Russian compliance.
“That said, in a move that may help, OPEC has also agreed that condensates (ultra-light oil) should not be included in the allies’ oil output numbers. Russia’s condensate supply is growing, so its exclusion should improve compliance on paper, even though total Russian supply will be unchanged. • Plugging the latest OPEC cut into our forecasts, and making some allowance for compliance difficulties, tips the oil market into a small deficit next year,” the company believes.
“The key uncertainty facing the oil market now is OPEC+ supply from April. Our best guess is that the cuts will be extended for the remainder of the year, since we forecast that global economic growth will still be subdued in early 2020. Only if global growth surprises on the upside, or there is significant progress in US-China trade talks, do we think that OPEC will contemplate higher output.”
To wrap up, the latest OPEC+ supply cut points to a small deficit in the market next year, but compliance is open to question, according to the company.
“We continue to expect that the price of Brent will rise to $70 per barrel by end-2020 on the back of slightly higher demand growth and slower growth in US production.”
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