OPEC plus agree to deeper cuts: what are the impacts?


Byline: Shabbir Kazmi

Oil producers' cartel led by Saudi Arabia and Russia agreed on Friday, 5th December 2019 for deeper oil output cuts during the first quarter of 2020, aiming at averting oversupply and supporting prices. The group of more than 20 oil producers agreed to cut an extra 500,000 barrels per day (bpd). The cartel seems fully cognizant of overflowing crude oil market, weak refining margins and no excess inventory.

The cut has come at a time of year when demand should be the strongest and should also add pressure to hike product prices. While the market response may be muted, the decision is likely to give price a support. By agreeing a 500,000 bpd cut based on 2018 levels, OPEC has put itself into a box. In order to achieve compliance the pressure is now on those producing above their quotas. A 500,000 bpd reduction does not alter the outlook for H1 2020, as global markets will remain oversupplied.

Abdulaziz bin Salman said he expected OPEC+ producers to continue cooperating beyond March. He also said, OPEC and its allies would only ease supply curbs and pumps more oil once global crude inventories fall and pricing reflects a tighter market. OPEC+ producers pump more than 40% of the world's oil and have constrained output since 2017 in an effort to balance rapidly rising output from the United States. While all oil producers would like to increase output, Saudi Arabia would only do so when it saw global inventories fall, he said. Saudi Arabia would like to see stocks within the range of the last five years and the average of 2010-2014, he added. The minister also stressed the need for producers such as Iraq and Nigeria to improve their compliance with promised cuts. Even if their compliance did not improve, Riyadh would not raise output unilaterally but instead would wait for consultations with OPEC+ at its next meeting in early March.

He also said that he expected a resumption of production from oilfilds jointly operated by Saudi Arabia and Kuwait very soon. But it would not affect both our countries' commitments (with OPEC+ cuts). The two countries halted output from the Khafji and Wafra oilfields more than three years ago, cutting some 500,000 bpd of supply.

The cut of 500,000 bpd is just symbolic as the targets are just brought closer to the...

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