Succumbing to market pressure, crude producers’ group OPEC and its 10 non-OPEC allies intervened to deepen their ongoing output cuts of 1.2 million barrels per day (bpd) by another 500,000 bpd on Friday (December 6) following the conclusion of their meeting of ministers in Vienna, Austria.
In a surprise for the market, OPEC revealed that bulk of the burden will largely fall on Saudi Arabia’s shoulders, with the kingdom announcing it would cut “voluntarily” by 400,000 bpd. That marks an increase of 167,000 bpd and would keep Riyadh’s headline production at 9.744 million bpd.
However, following two days of tense negotiations, Saudi Oil Minister Abdulaziz bin Salman, said compliance of other members would be keenly monitored. To this effect, OPEC and non-OPEC allies will not only hold a meeting of its compliance and monitoring group, but a full-fledged extraordinary ministers’ meeting March 4-6, 2020, well ahead of customary summer meeting of heads.
VIENNA, AUSTRIA – 2019/09/26: The logo of the Organization of the Petroleum Exporting Countries … [+] (OPEC) at the headquarters. (Photo by Omar Marques/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images
Many OPEC members, often accused of non-compliance with the promised cuts, came out to say they would be pitching in. Iraq’s oil minister Thamir Ghadhban said his country, one of the largest OPEC producers, will cut headline production by 50,000 bpd as part of the fresh range of cuts leading to its new quota of 4.462 million bpd.
Russia, the biggest of the 10 non-OPEC producers, would be cutting 70,000 bpd. The country’s oil minister Alexander Novak said Moscow wants to avoid any “oil market turbulence in 2020.”
It raises the point that the move will cause OPEC to not only shed market share but a provide price supportive cushion which could spur further non-OPEC production. According to the International Energy Agency (IEA), the likes of Brazil, Canada, Guyana and Norway, could add to burgeoning U.S. production thereby swelling non-OPEC production by 2.3 million bpd.
But according to Saudi Oil Minister, the OPEC+ cuts – should they be fully realized – could take out as much as “2.1 million bpd of production” and would serve to balance the market. That remains to be seen, given how notoriously unreliable most of the 14 OPEC and 10 non-OPEC producers who have signed on to the deal have proven in the past on the issue of compliance.
There are also severe demand concerns for 2020, with the U.S.-China trade spat far from being resolved, a possible German recession, uncertainties over Brexit and negative outlooks on emerging markets such as Argentina and Turkey.
For now though, oil benchmarks have responded positively. At 17:37 GMT on Friday, the Brent front-month contract was up +1.20% or 76 cents to $64.15 per barrel, while the West Texas Intermediate was trading 1.01% or 59 cents higher at $59.02 per barrel.
Short-term gains are there for the taking with this surprise to the upside, but the real test would come early in the New Year. For now, OPEC and its allies have given up yet more ground and risked market share for the sake of gains that remain uncertain.