The OPEC and non-OPEC alliance, or OPEC+ group, agreed on December 5-6 to make a deeper cut in production, trimming supply by a further 500,000 barrels per day to 1.7 million barrels per day from January 2020. Global oil prices surged above $65 per barrel as 2019 drew to a close. However, the rise in oil prices has more to do with a phase one trade deal between the United States and China than the decision by OPEC and its allies.
Still, it didn’t hurt that OPEC managed to extract a commitment from its 14 members for better compliance with their allocations in an effort to drain oversupply from the market and lift prices to levels that are deemed more comfortable for OPEC and its Russian-led partners. The success of the meeting was due in large part to the leadership of Prince Abdulaziz bin Salman, who led the Saudi delegation for the first time as his country’s energy minister.
The ministerial gathering on December 5 at OPEC headquarters in Vienna was not without drama. Prince Abdulaziz, asserting his authority as representative of OPEC heavyweight Saudi Arabia, drove a hard bargain to secure the agreement, that was clinched several hours after the conference had been due to end. Iraq’s oil minister, Thamir Ghadhban, was reportedly reluctant to commit to the agreement because the Iraqi government had resigned, and he was serving in a caretaker capacity. He was also reportedly miffed that Iraq had been singled out for noncompliance with its allocation, as was Nigeria. In an unusual move, Prince Abdulaziz made sure that both Ghadhban and Nigeria’s minister of state for petroleum resources, Timipre Sylva, took the stage at the news conference following the conclusion of the OPEC+ meeting on December 6 to answer questions from the media.
Such a bold move signaled a new management style by the Saudi minister even if it ruffled some feathers in the process. In the end, the numbers have to add up, and Iraq was at one point producing more than 270,000 b/d above its quota under the previous supply cut agreement. Under the new quota allocations that come into effect in January 2020, Iraq will have to reduce production by a further 50,000 b/d, which means it will need to make a much steeper supply cut to achieve 100% compliance. Ghadbhan told reporters a new agreement that would allow Iraq’s State Organization for Marketing of Oil to market some Kurdish oil would allow Iraq to honor its commitment. Nigeria, too, is producing 100,000 b/d above its allocation and has pledged better adherence in the future.
Saudi Arabia has taken on the burden of slashing its output far below its quota to balance the market. Prince Abdulaziz said after the meeting that Saudi Arabia would continue to make a voluntary contribution by producing 400,000 b/d less than its allocation, which would take the total reduction to 2.1 mb/d, though a final communique by all 25 members party to the Declaration of Cooperation made clear that this was “subject to full conformity by every country participating …” Russia and other producers, such as Oman, won a concession in getting condensates excluded from their totals. This, in effect, means that they will be able to increase oil production since condensates were previously included and amount to some 1.5 mb/d, according to the International Energy Agency.
For now, the deal appears to have satisfied market players and the improvement in oil prices since December 6 comes at an opportune time for Saudi Arabia, which just launched its highly anticipated Aramco initial public offering on the domestic exchange. Trading in Aramco shares began on December 11 at a price that valued the world’s most profitable company at $1.7 trillion on the first day and $2 trillion on the second, fulfilling the valuation sought by Crown Prince Mohammed bin Salman, Prince Abdulaziz’s half-brother and the kingdom’s de-facto ruler.
The oil market’s structure is currently in favor of the oil producers with prompt prices higher than forward prices, an indication of a tighter market and one that does not encourage additions to inventories, which remain above the five-year average.
The IEA’s December Oil Market Report suggested that, despite these measures and slower non-OPEC growth, the market could still be in surplus in the first quarter of 2020: “Despite the additional curbs and a reduction in our forecast of 2020 non-OPEC growth to 2.1 mb/d, global oil inventories could build by 0.7 mb/d in 1Q20.” By the IEA’s calculation, OPEC produced 29.66 mb/d in November, a number that would have been higher were it not for Saudi Arabia cutting production by 300,000 b/d below its quota. The December agreement could prompt output to fall to 29.3 mb/d in January, assuming full compliance and no change in production from Libya, Iran, and Venezuela. That would still leave the group producing 700,000 b/d above the first quarter call on OPEC crude in the first quarter and up to 1 mb/d in the second quarter. OPEC has scheduled an extraordinary meeting for March 2020 to determine whether further action is needed.
OPEC’s assessment, in its December Monthly Oil Market Report, of non-OPEC supply growth in 2020 matches the IEA’s forecast, though the two organizations differ on the size of the potential oversupply in the first and second quarters of the year. The IEA analysis points to a possible 144 million-barrel build in global inventories in the first half of the year while OPEC sees a much lower stock build of around 40 million barrels. OPEC tracks inventory levels carefully in setting its production targets and, should the IEA numbers prove to be accurate, this would imply the need to extend or even deepen the cuts. Venezuela, Libya, and Iran are exempt from supply reductions. While Iranian output has been severely constrained by sanctions, Venezuela has managed to ramp up its output despite sanctions and infrastructure limitations. Libya has managed to maintain production despite enormous challenges posed by its fractured politics and ongoing violence. However, conflict has escalated in recent weeks and may impact the oil sector.
On the demand side, both OPEC and the IEA expect growth to pick up in 2020, topping 1 mb/d, because of a more positive global economic outlook. Based on International Monetary Fund estimates, OPEC sees global economic growth of 3% in 2019 and 2020. The IEA predicts slightly higher growth of 3.4% in 2020. OPEC projects demand for its oil, averaging 30.7 mb/d in 2019, to fall to 29.6 mb/d in 2020, which leaves little margin for leakage. According to secondary sources, OPEC produced 29.56 mb/d in November. If OPEC members reduce production to 29.22 mb/d in January 2019, that would put them at their lowest level since 2009 and further erode the group’s market share, which was estimated at 29.6% of the 99.78 mb/d global oil market.
In the third quarter of 2019, OPEC reported its production averaged at 29.4 mb/d, some 2.3 mb/d lower than demand for OPEC crude. The fact that oil prices remained weak, despite supply restraint and inventories above the 5-year average, shows the tough task of balancing markets in the face of continued growth in non-OPEC supply, mostly from the United States, which has overtaken Saudi Arabia as the world’s largest oil exporter.
The next few weeks and months will show whether OPEC and its partners have done enough to balance the market, and much will depend on whether the alliance of 25 producers can maintain a level of discipline needed to make the agreement work.
