OPEC talks end without announcement of expected cuts

Andrew Cummings
December 6, 2019

Crucial details have yet to emerge from the ministerial meeting of the Organization of Petroleum Exporting Countries in Vienna on Thursday, and its decisions must also be ratified by the wider group known as OPEC+ on Friday.

Russian Energy Minister Alexander Novak said a panel of energy ministers including Saudi Arabia and Russia had recommended OPEC+ deepen the cuts by 500,000 bpd.

Production cuts were first implemented in January 2017 in an attempt to stabilize prices and trim global inventories in response to the rapid rise in US shale oil production.

Next year, rising production in other non-OPEC countries such as Brazil and Norway threaten to add to the glut.

Oil prices rose on Thursday ahead of an OPEC meeting where members are expected to agree on deeper output cuts in an effort to prop up prices and prevent a glut next year.

According to Guardian, Rystad Energy, in its latest report, disclosed that the global oil market could be profoundly oversupplied by 0.8 million barrels per day (BPD) in the first half of 2020, as empirical evidence had shown that a 1 million BPD surplus of oil could lead to a decline in oil prices by around 5% per month, and a potential drop of 30% over six months. The current cuts expire in March and the new deal could be extended to June or until the end of 2020.

"We really do see some risks of oversupply in the first quarter due to lower seasonal demand for refined products and for crude oil", Novak said.

Washington has forced an even steeper reduction in supply through sanctions on OPEC members Iran and Venezuela aimed at choking both countries' oil export revenue. There are concerns for the implementation of the 2020 budget if oil prices fall below the proposed benchmark. Brent crude futures LCOc1 were up by around 3% near $63 per barrel on Wednesday.

OPEC+ agreed past year to reduce output by about 1.2 million barrels a day in order to eliminate a surplus and bolster crude prices.

In the past few months Trump has said little on OPEC but that might change later in 2020 if oil and gasoline prices rise - a politically sensitive issue in the United States.

OPEC sources have said Riyadh was pressing fellow OPEC members Iraq and Nigeria to improve their compliance with quotas, which could provide an additional reduction of up to 400,000 bpd.

Deepening the cuts by 500,000 bpd should not at all be painful for the group-indeed, it will hardly be a cut at all-as they are now overcomplying as a whole with the current level of the cuts anyway.

"The kingdom has explicitly communicated to OPEC that it will no longer tolerate under-compliance", Amrita Sen, chief oil analyst at Energy Aspects Ltd., said before the committee meeting. Condensate is a high-value light type of crude oil extracted as a by-product of gas production.

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