Reaching a cut deal of 1.2 million barrel, Is it Sufficient?

07/12/2018 |

 Vienna | 

OPEC and its cooperating allies, the OPEC+, have struck a deal to curb production by 1.2 million barrels, a reduction deal to be reviewed in April 2019. While OPEC countries would contribute by 800 thousand barrels reduction, the non-OPEC countries would reduce by 400 thousand barrels making a total of 1.2 million barrels cut, using the October total production as a baseline. Russia has agreed to the deal but there has been no confirmation of the individual allocation yet of how much each country would contribute. It is possible that Saudi Arabia and Russia would take a significant share of this deal. All countries including Iran, Nigeria and Libya will sign to the cut agreement, although some countries may be exempted. Crude prices have immediately rebounded 4% $52.39 for WTI, $61.5 for Brent.

In the opening sessions of the OPEC-non-OPEC meeting, UAE Energy Minister Al-Mazroui stated that the OPEC+ group need to discuss market volatility which was experienced in the last second half of 2018, and it remains a major concern. Three new observing non-OPEC countries attended the meeting as observes; Chad, South Africa and Uzbekistan.

Negotiations proved to be a tough one, minister Alfalih stated while walking out of the group meeting that he was not confident they would reach an agreement. Iran has initially not been supporting the OPEC cut plans and refused to join the deal even symbolically. Iran has been asking to be exempted from making a cut given the US sanctions that reduced its production to 1-1.5 million barrel per day.

“The cut is what the market really needs, it will return prices to $60-70 a barrel which is the equilibrium price, even if shale continues to grow. Continued growing demand is necessary for 2019 to keep the market health”, said Helima Croft Global Head of Commodity Strategy at RBC. Exempts may be given to countries like Nigeria who has upcoming elections, rising insurgency, and economic crisis, Venezuela with unprecedented political and economic instability, and Iran which faces US sanctions. Nigeria continues to see it hard to reduce its production given its economic situation, “we need every single barrel of oil” said the Nigerian Oil Minister.

The total cuts may increase to more than 1.6 million barrels by the participation of Iran and Venezeiual, and declining Saudi production in January“, said Joseph McMonigle, a former US DOE official who leads an American consultancy, the Abraham group.  

How was the OPEC+ formed?

The alliance between OPEC and oil-producing countries from outside the organisation has been formed in 2016 amid the rising production of shale oil. Saudi Arabia Crown Prince Mohammad bin Salman led key negotiations with Russian President Vladimir Putin that led to forming an alliance between OPEC countries and key oil-producing countries from outside the organisation to form an alliance referred to as the OPEC+. The OPEC+ is composed of 30 major oil producers including Russia, Mexico, Malaysia, Turkmenistan, Oman, Bahrain,

Together the OPEC+ decided on reducing production by 1.6 million barrels in 2016 for six months, which was extended at later stages while monitoring different levels of compliance via the newly formed Joint Ministerial Monitoring Committee (JMMC). The success of the OPEC+ has been key in removing an oversupplied market bringing the OECD stock to a five year where prices reached $60 and beyond. A declaration of cooperation was made, and the success of this alliance has led OPEC to call for institutionalising this cooperation on a long-term basis by founding a new secretariat of the OPEC-non-OPEC countries in Vienna.  

What is the impact of the Qatari withdrawal?

Meanwhile, the Qatari delegation has attended their final OPEC meeting. “It is a sovereign decision, we would like them to stay” Said Minister Alfalih of Saudi Arabia while leaving the OPEC meeting. Qatar announced that their decision to leave the group comes out as a result of their interests to focus on gas as their main business, while some speculators think that Qatar sees a diminishing role of the organisation. Under all scenarios, the withdrawal of Qatar does not seem to have made an impact on the OPEC+ negotiations and its impact on the market as a deal was struck.