Opec likely to extend production cuts at upcoming meeting

Abu Dhabi: Opec+ will likely agree to extend their current round of production cuts beyond March and up until the end of 2020, analysts said as the group prepares to convene in Vienna on Thursday and Friday.

Opec+ is an alliance of crude producing countries that includes Opec member and non-Opec countries, such as Russia, Oman and Bahrain,

Mixed signals have been coming out throughout the week on whether Opec+ will extend their production cuts — currently at 1.2 million barrels per day (bpd) — or impose even further cuts to help support oil prices.

Iraqi oil minister Thamir Ghadhban signalled support for additional cuts of up to 400,000 bpd. In contrast, Russian energy minister Alexander Novak said that Russia was more inclined to a wait and see policy until April before deciding on further cuts, and that the country had still not yet finalised their position ahead of the Opec+ meeting.

“Our expectation is that Opec+ will keep the existing cuts in place and extend it, that seems to be the most acceptable option to most members,” said Edward Bell, commodity analyst, Emirates NBD.

Bell said that compliance with the body’s current round of production cuts would likely be among the meeting’s main discussions, just as it was back in September in Abu Dhabi when Opec+ held its Joint Ministerial Monitoring Committee meeting.

“Even if they were to endorse deeper cuts of 1.5 or 1.8 million bpd there is still an issue of complying with those higher production cuts.

“Compliance has been achieved to this point thanks to Saudi Arabia cutting far more than required to, and so if there is an increase in the scale of the overall production cut size there is the concern that Saudi Arabia will again have to do most of the extra cutting if the other countries are not participating,” he added.

“I would expect that if there’s going to be a disagreement between Opec it would come as a result of those issues pertaining to compliance,” he said, also highlighting how the group had no forcible ways to make members comply with their production quota.

Sarah Emerson, ESAI Energy’s managing principal, shared the same view, highlighting how countries such as Saudi Arabia would look to get other members to do their part.

“What’s interesting about the meeting this week is that most of the members who have over complied [with the production cuts] want those who have not complied to improve their compliance.

“The powers that be in Opec have made progress in this area, they have for four of the countries increased or have changed the baseline for their target production to make it easier for them to comply, the most notable of these four countries is Nigeria; the other three are Ecuador, Malaysia and Brunei.

“When you add up all of these changes in target it actually made compliance easier to the tune of 234,000 bpd across those four countries,” she added.

For his part, Bjørnar Tonhaugen, head of oil market research at Rystad Energy, warned that a failure to agree on more production cuts would lead to an oil supply gut in 2020.

“We have a clear message to the Opec+ countries: A ‘rollover’ of the current production agreement is not enough to preserve a balanced market and ensure a stable oil price environment in 2020.

“If Opec and Russia don’t extend and deepen their cuts, we could see Brent Blend dip to the $40s next year for a shorter period,” he added.

“In order to ensure a balanced market, our research indicates that Opec would need to reduce crude production to 28.9 million bpd — a drop of 0.8 million bpd from the level seen in the fourth quarter of 2019-levels,” he said.