Nigeria's foremost Online Energy News Platform

OPEC+ Succumbs to Saudi Pressure to Redistribute Oil Cuts


-By Gideon Osaka

The Organisation of Petroleum Exporting Countries, OPEC+ is expected to adjust its output target and redistribute production cuts between its members as a result of pressure from Saudi Arabia, which has long carried an outsized share of the burden.

OPEC, which pumps more than half the world’s oil, agreed in Vienna during their last meeting of the year on December 6, to reduce its output target by 500,000 barrels of oil per day, bopd, according to delegates, bringing it in line with recent production levels. Saudi Energy Minister Prince Abdulaziz bin Salman gave a clear signal before the meeting that his priority was to get some members to stop cheating and implement the cuts they have promised. “Like religion, if you are a believer you have to practice. And without practice you are an unbeliever,” Prince Abdulaziz said at the opening session of the meeting. “The market will have to trust us. The analysts will have to believe us” and if they don’t “we cannot deliver what we want to achieve. It is as simple as that, and sometimes it is as tough as that.” After days of rumour and mixed messages that whipsawed prices, the shape of the adjusted deal between OPEC and its allies gradually emerged.


Instead, delegates said OPEC would rejig its deal to formalize the extra supply reductions some of its members, notably Saudi Arabia, have already been making for most of the year. Then it would share them out more equitably among the countries that have consistently failed to meet their targets. Saudi Arabia, the world’s largest oil exporter and the group’s de-facto leader, is expected to pump at current levels under the new agreement, said delegates, who asked not to be named because the information wasn’t yet public. “This is housekeeping,” said Roger Diwan, the veteran OPEC watcher at consultant IHS Markit Ltd., who was in Vienna monitoring the meeting. “OPEC is re-adjusting its production quotas.” Under the new deal, the size of the OPEC+ daily production cuts target will be increased from 1.2 million barrels to 1.7 million barrels, compared to a baseline of October 2018, according to Ministers including Russia’s Alexander Novak and Iran’s Bijan Namdar Zanganeh. That doesn’t require the group as a whole to pump less oil, since it was already implementing an additional cut of that size in October 2019. Saudi Arabia, wishing to lead by example, has pumped well below its quota of 10.3 million barrels per day for the duration of the agreement. The kingdom’s output averaged 9.8 million so far this year. Other nations including Angola, Azerbaijan and Mexico have simply been unable to sustain their production due to natural declines. The “adjustment cannot really be interpreted as something that effectively changes the expected oil balance,” consultant JBC Energy GmbH said in a note. “It is more of a compliance manoeuvre and an effort to distribute the Saudi over-compliance that has been in place since April to other OPEC+ members.” The target will only come into force if all members of OPEC+ implement 100 percent of their pledged curbs, Novak said. That’s something the alliance has struggled to achieve throughout the three years of its existence, with some countries such as Iraq actually increasing output after promising to cut.

Those nations that have failed to make their pledged cuts may have to reduce their current output under the adjusted agreement. The new target for Iraq was a particular sticking point during the six hours of talks on the last day of the conference, delegates said. OPEC+ ministers were in the process of finalizing each country’s new quotas, said a delegate. The ruckus reflects pushback by producers facing stronger pressure than in the past to comply and contribute real, voluntary cuts, said Bob McNally, president of Rapidan Energy Group and a former oil official at the White House under President George W. Bush. But Prince Abdulaziz is getting what he wants “and I think he’s going to put more pressure than anyone has before to get real cuts from these guys.” For Russia, which has achieved its targeted cuts in just three months this year, full compliance got easier on as OPEC agreed to exclude a very light oil called condensate from the country’s quota. Novak had argued that a recent increase in production of that hydrocarbon, which is extracted from natural gas fields, was the only reason Russia was falling short of its pledge. The new 500,000 bopd quota reduction will only apply in the first quarter of 2020, said Novak. The group will hold an extraordinary meeting in March to discuss what to do next, said a delegate. Those talks could coincide with a tricky patch for the oil market. Demand growth is slowing and another big expansion in rival production is coming down the pipeline. Together those factors could create another oversupply that drives international prices back down toward $50/bbl. That’s too low for most OPEC members to balance their budgets, and would make an unfortunate epilogue for the record-breaking initial public offering of Saudi Arabia’s state oil company, which set the final price of its shares.

…OPEC+ Cuts won’t prevent a Surplus in 2020, says IEA
World oil markets are predicted to face a surplus in 2020, even if the Organisation of Petroleum Exporting Countries, OPEC and its partners deliver newly-announced production cuts in full, the International Energy Agency, IEA, said.

Oil inventories are expected to accumulate by 700,000 barrels per day, bpd in the first quarter even if OPEC and its allies implement the entire cutback of 2.1 million barrels per day, MMbpd agreed upon during their last meeting of the year held in Vienna, Austria, December 6, the IEA said in a monthly report. Supplies outside the group, led by United States shale, continue to grow much faster than world demand. While crude prices climbed to a 12-week high in New York after OPEC+ surprised traders with their latest intervention, they remain below $60 a barrel amid concern that the additional output curbs still won’t be enough. The U.S. briefly became a net exporter of oil three months ago, underscoring the challenge OPEC faces from America’s shale boom. “The market has done its own sums and the reaction to oil’s new deal has so far been muted,” said the Paris-based agency, which advises most of the world’s major economies. The extra OPEC+ curbs would translate into an actual reduction from current levels of 532,000 barrels a day, the IEA said. Implementing that fully may be a tall order, as some producers like Iraq and Nigeria have barely made the cutbacks they promised to enact this year. A change to the terms of the OPEC+ agreement, which now exempts light oil known as condensate produced by the non-OPEC members, could also undermine the coalition’s efforts. Condensate production in those countries, such as Russia and Azerbaijan, has the potential to increase from its current level of about 1.5 MMbpd, according to the IEA. Saudi Arabia, OPEC’s biggest member, has already made considerable progress in fulfilling its output commitments, including additional voluntary reductions announced at the close of the OPEC meeting on Dec. 6. The kingdom pumped 9.9 MMbpd in November, the IEA estimated. “The overall effectiveness of the OPEC+ agreement depends on the willingness of all its parties to fully comply, including those whose compliance so far has been less rigorous,” the agency said. OPEC and its partners are getting some solace from a recent recovery in oil demand. Global consumption increased at the strongest rate in a year during the third quarter, expanding by 900,000 bpd, according to the report. That’s almost twice the pace seen in the second quarter. Demand is set to accelerate further in 2020, when it will expand by 1.2 MMbpd, about 1.2 percent to average 101.5 MMbpd, the IEA predicts. OPEC may also be reassured that supply from some of its rivals, such as the U.S., Brazil and Ghana, is increasing less quickly than the IEA previously forecast. The agency lowered its projections for non-OPEC production growth in 2020 by about 200,000 bpd. Yet supplies outside OPEC will nonetheless expand much more vigorously than world demand, swelling by 2.1 MMbpd next year as a new tide of American shale-oil is joined by offshore projects once considered unviable in an era of constrained prices, from Brazil, Norway and Guyana. As a result, the surplus in global markets may swell to as much as 1 million barrels a day during the second quarter, the agency said. That poses a considerable challenge for the cartel and its allies, who will meet again in early March to consider their next move, IEA added.

Social