OPEC not only continued to cut its crude oil production in December 2019, but it also managed to reach its deeper-cut target for Q1 2020 a month earlier than planned, the monthly S&P Global Platts survey showed.
The achievement may not look that remarkable if one considers that, as usual, not all cartel members respected their December—looser—quotas, and that OPEC’s largest producer and de facto leader, Saudi Arabia, still did the heavy lifting and compensated for the cheating of some other producers.
As in all previous months, Saudi Arabia overcomplied significantly with its share of the cuts, helping the cartel achieve the new quota effective January a month early. Saudi Arabia’s December oil production was 9.82 million bpd, as per the Platts survey. This is way below the December quota of 10.3 million bpd and even below the new Q1 2020 Saudi quota of 10.14 million bpd.
The Saudis were still compensating for rogue OPEC members Iraq and Nigeria, which, despite cutting their respective production, were still not complying with their December quotas, the S&P Global Platts survey found.
OPEC’s total crude oil production stood at 29.55 million bpd in December, down by 100,000 bpd compared to November, according to the survey.
December’s crude oil production at the 10 OPEC members that have the stricter quotas as of January—with Venezuela, Libya, and Iran exempt and Ecuador leaving OPEC on January 1—was 25.06 million bpd, just below the combined new ceiling of the 10 producers with quotas—25.15 million bpd, Platts’ survey shows. This survey’s findings were similar to ones in the monthly Reuters survey, which showed earlier this week that OPEC’s crude oil production further declined in December as Saudi Arabia continued to lead by example cutting much more than required and as the biggest laggards in compliance—Iraq and Nigeria—moved to better comply with their quotas.
The Saudis reduced their crude oil production by another 50,000 bpd in December, taking the Kingdom’s over-compliance to more than 500,000 bpd compared to its quota in the deal, according to the Reuters survey.
At the OPEC+ meeting on December 6, OPEC and its partners decided to deepen the current cuts by 500,000 bpd in the first quarter of 2020, when demand is expected at its weakest for 2020. This brings total production reductions at 1.7 million bpd—that is if rogue members fall in line with their quotas. Of these, OPEC’s share of the cuts is 1.2 million bpd.
Considering the pledge from Saudi Arabia that it would continue to significantly overcomply with its share of the cuts, the total OPEC+ cuts could be as high as 2.1 million bpd, OPEC said.
Just as OPEC and its leader Saudi Arabia showed that they are serious about preventing another glut this year, the geopolitical flare-up in the Middle East put OPEC’s production cuts and potential spare capacity to the spotlight again, as market participants panicked (for a couple of days, at least) about potential supply disruptions in the region. Suhail al-Mazrouei, the influential energy minister of the United Arab Emirates (UAE), said this week that he doesn’t see an immediate threat to oil flows in the world’s most important oil chokepoint, the Strait of Hormuz.
“We are not forecasting any shortage of supply unless there is a catastrophic escalation, which we don’t see,” al-Mazrouei said on the sidelines of an energy conference in Abu Dhabi on Wednesday, as carried by Reuters.
The heightened tension in the Middle East is throwing in another unknown in OPEC and allies’ plans for after March 2020, when the current deeper-cut deal expires.
As of early on Friday, the U.S. and Iran appeared to be in a ‘de-escalation mode’, and unless supply is actually disrupted, analysts do not expect oil prices to trade much higher than US$65 a barrel Brent Crude in coming weeks.
“The fundamental outlook for the oil market is not constructive, with expectations that the market will return to surplus over 1H20,” Warren Patterson, ING’s Head of Commodities Strategy, and Senior Commodities Strategist Wenyu Yao said on Thursday.
According to ING’s strategists, global oil demand growth is still languishing and the market will be closely watching to see what OPEC+ does next.
“And as we move closer to March, the market will get increasingly nervous about whether OPEC+ will extend its output cut deal through until the end of June. Concerns over demand also continue to linger. And while a phase-one trade deal may bring some relief, if we look at refinery margins, they remain under pressure, suggesting demand is not great at the moment,” ING’s strategists said.