Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

OPEC’s Next Meeting May Unveil New Approach to Cuts

Published 18/10/2019, 08:38
Updated 18/10/2019, 13:06
OPEC’s Next Meeting May Unveil New Approach to Cuts

OPEC’s Next Meeting May Unveil New Approach to Cuts

(Bloomberg) -- As the clamor grows for OPEC to slash even more oil production, and the cartel vows to consider any necessary action, its next meeting could result in an unusual step: a preemptive supply cut.

The Organization of Petroleum Exporting Countries and its partners -- known as OPEC+ -- have reduced output this year to contain a glut created by faltering oil demand and surging U.S. shale supply. Amid forecasts of a new surplus next year, there’s a chorus of calls from Morgan Stanley (NYSE:MS) to Commerzbank AG (DE:CBKG) for the alliance to deepen the curbs when it meets in Vienna in December.

But in recent months global markets have grown tighter, removing any immediate need to act. If extra cutbacks are announced, it would mark a break with tradition for the cartel, which typically waits for a glut to emerge before responding.

“It would break the mold,” said Derek Brower, a director at consultant RS Energy Group. “OPEC makes policy reactively, not proactively.”

Depressed oil prices may compel the group to change its habits. Crude has slumped about 20% in six months to around $59 a barrel in London -- below the levels most OPEC nations need to cover government spending -- and on Friday headed for a weekly loss of 1.4%. A renewed sell-off in 2020 would squeeze revenues even further.

‘Daunting’ Stockpiles

OPEC+, a collective of 24 producers that pumps half the world’s oil, confronts a “daunting” surplus in the first six months of 2020 of about 1.2 million barrels a day, according to the International Energy Agency. Demand is being eroded by the weakest global growth in a decade and the U.S.-China trade war, while supplies are swelling in the U.S. and elsewhere. As a result, the group is facing a “serious challenge” to defend prices, said Neil Atkinson, the agency’s head of oil markets.

The coalition agreed to cut output by 1.2 million barrels a day this year, a reduction that has been compounded by a range of crises, from sanctions on Iran to a missile attack on Saudi Arabia’s oil-processing facilities. Nonetheless, traders and consultants from Gunvor Group Ltd. to Rystad Energy AS recommend a further cutback when OPEC+ meets on Dec. 5-6.

“If by December there are clear signs of economic weakness, then a further deepening by a minimum of 500,000 barrels a day would be highly likely,” said Ed Morse, head of commodity research at Citigroup Inc (NYSE:C). in New York.

OPEC’s top officials have signaled they’re prepared to consider this. Secretary-General Mohammad Barkindo said the group will do “whatever it takes” to prevent a market slump and that members are willing to “put all options on the table.” Saudi Energy Minister Prince Abdulaziz bin Salman, who represents OPEC’s biggest member, said his job is to check a surplus.

Even Russia’s President Vladimir Putin, who leads OPEC’s most important, yet often reluctant ally, has said he recognizes the need for further cooperation.

Yet announcing a supply cut while the market is in deficit would be a departure for the organization.

When OPEC+ was established in late 2016, surplus inventories had ballooned to a record of more than 300 million barrels and were still accumulating at a rate of 1.4 million a day, according to the Paris-based IEA. Its current round of cuts was agreed in late 2018, when supply was exceeding demand by 2.7 million barrels a day.

Tardy Approach

In the past, OPEC has more typically been criticized for acting too slowly. When a surplus brews, members are reluctant to gamble that sacrificing sales volumes will be compensated by higher prices. There’s also the inevitable haggling over how much each nation should cut.

“It’s far easier for OPEC to sit on its hands, hope for the best, ignore gloomy forecasts for as long as possible and try to deal with any problems after they’ve emerged, rather than start the painful and tedious negotiations that are always needed before a new deal,” RS Energy’s Brower said.

The group can also be tardy in increasing production. OPEC’s inaction during the rally of early 2008 allowed oil prices to hit an all-time high above $147 a barrel, feeding into the global recession that sent crude tumbling later that year.

When OPEC assembles at its Austrian headquarters in December, global markets probably won’t be telegraphing any immediate surplus to be dealt with.

World oil inventories contracted in the third quarter by the most in a decade, falling by 228 million barrels, according to OPEC, as summer demand proved surprisingly robust and the group’s deliberate cutbacks were amplified by disruptions in Iran, Venezuela and Saudi Arabia.

Stockpiles are poised to shrink further in the fourth quarter, even if the kingdom has fully restored output from the Sept. 14 missile and drone strikes, the IEA estimates. Inventories may decline by about 55 million barrels.

Yet the outlook for the first six months of 2020 may nonetheless spur the producers into acting. The alliance needs to cut supply by 1 million barrels a day, and the only question now is the timing, said Bob McNally, president of Rapidan Energy Group and a former oil official at the White House under President George W. Bush.

“Normally it’s OPEC’s habit to wait until they can see the oversupply in the whites of the eyes,” McNally said. “But the heavily swollen balances for the first half of next year may push them to cut production earlier than planned.”

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.