Oil prices have climbed back from their earlier highs after surging on news of deeper cuts agreed to by the Organization of Petroleum Exporting Countries.
OPEC, at its meeting in Vienna, agreed to deeper cuts than already have been in place. That agreement came Dec. 6 after a lengthy meeting that reportedly often turned contentious and one that dragged on until close to midnight with no resolution.
At approximately 1 p.m. Dec. 6, the price of benchmark U.S. crude WTI was up 47 cts from the Dec. 5 settlement on the CME, rising 0.8% cts to $58.90/barrel. That was down from an earlier spike to $59.85/b.
Brent, the global benchmark crude, was up just about 1% to $64.92/b, a gain of 63 cts. It had peaked at $64.88. Ultra-low-sulfur diesel on CME was up 0.88 cts to $1.9418/gallon, a gain of 0.46%. It had peaked almost 2.5 cts/g more than that, at $1.9734/g.
Counting the barrels in the deal announced by OPEC requires two comparisons: what the new group and country quotas are compared to old quotas and what the new quotas are relative to what is actually being produced.
Based on the reporting and quick analysis that came out of the large contingent and analysts in Vienna, the best guess is that the shifts are likely to take another 200,000 to 300,000 b/d off the market, even though the stated change in quotas is closer to half a million b/d.
The agreement calls for tightening quotas by 372,000 b/d on OPEC nations and 131,000 b/d on non-OPEC nations that have pledged their cooperation. Those figures come from OPEC and the analysis of the deal by S&P Global Platts.
But that’s where it gets tricky to just assume output is dropping by about 500,000 b/d. For example, Saudi Arabia’s new quota is down 167,000 b/d to 10.144 million b/d. But it’s not producing that now, having aggressively slashed output in the past year well below what it had agreed to do at last year’s meeting. Platts reported that Saudi Arabia produced 9.9 million b/d in November.
Bloomberg quoted Saudi Prince Abdulaziz, who is also the energy minister, as saying Saudi Arabia would continue with a cut of 400,000 b/d, which takes it closer to 9.5 million b/d from the November estimate. But Platts reported that the minister said the Saudis would produce about 9.75 million b/d.
Then there are the questions surrounding Iraq and Nigeria, both of which have been handed further cuts to implement despite the fact that they were each several hundred thousand barrels per day above their earlier quotas, a sore point with Saudi Arabia. OPEC’s overcompliance with its quotas came overwhelmingly from the Saudi industry.
The additional 131,000 b/d in quota reductions given to non-OPEC comes as that group of nations led by Russia had been approaching the levels it agreed to a year ago, when it backed a cut of 400,000 b/d. According to a recent Bloomberg report, reductions in October off the group’s baseline were 383,000 b/d, just under the 400,000 b/d it had pledged. But compliance has been slow over the course of the year, particularly from Russia, and now the group is being asked to cut about a third more than it already has done so. Reaching the overall OPEC/non-OPEC targets is going to be largely on the backs of these countries. (There is one analysis on what might be called “oil Twitter” that shows OPEC countries could actually slightly increase their output and still stay compliant.)
What is not known is what consideration OPEC ministers gave to those voices that say projections of a sharp increase in U.S. production next year are wildly optimistic. The supply/demand models of agencies like the International Energy Agency all show supply growth outstripping demand next year, with more cuts by OPEC needed to reach some sort of equilibrium.
These new quotas run through March. OPEC is expected to meet before then. That the agreement hammered out in Vienna lasts only through March hints at the possibility that OPEC will take the first three months of the year to see if tighter bank lending and investor demands for shale companies to start acting like more normal enterprises rather than debt-fueled machines trying to get one thing done — produce more hydrocarbons — will make those projections fall flat. If the U.S. underperforms, OPEC’s job in the last three quarters of 2020 will be a lot easier.
