Saudi Arabia is moving quickly to halt the slide in oil prices, telegraphing a production cut intended to erase some of the re-emerging supply surplus.
Saudi oil minister Khalid al-Falih said on Monday that the kingdom would slash oil exports by 500,000 bpd in December, a move that would go a long way to reversing the 1 million-barrel-per-day increase in output agreed to by OPEC+ in June.
It was only a few weeks ago that al-Falih was trying to reassure the market that Saudi Arabia had enough spare capacity in the event of an outage; now he is rushing to try to stop the slide in prices but paring back production.
The production cut would come just after crude oil officially entered bear market territory, falling 20 percent from its October peak.
But it is unclear at this point if the rest of the OPEC+ coalition, including Russia, will join the Saudis. The OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC) met over the weekend in Abu Dhabi to consider options for 2019. The group was rumored to be considering a collective production cut, although the meeting ended on Sunday with no firm commitments.
Still, in an official statement, the group seemed open to the idea. The JMMC “noted that 2019 prospects point to higher supply growth than global requirements,” which is another way of saying that they are nervous about a supply glut. Also, the committee stated that a global economic downturn could depress demand, and “could lead to widening gap between supply and demand.” These conditions “may require new strategies to balance the market.” It would seem that the OPEC+ coalition is laying the groundwork for a production cut. The official ministerial meeting in Vienna in early December will reveal much more about the group’s plans heading into 2019.
Al-Falih said that the OPEC+ group needs to cut output by 1 million barrels per day (mb/d) below October levels. Saudi Arabia will alone account for half of that total, removing 500,000 bpd in December. BP’s Bob Dudley told Bloomberg TV that al-Falih’s announcement “probably will firm the price.”
That’s probably all it will do, at least for now. Surging shale production at a time when the demand picture is darkening will make a renewed run up in prices difficult. “It is beginning to look alarming in the sense that the resurgence of non-OPEC supply — in particular shale oil from the United States — is putting a lot of pressure on this fragile equation,” OPEC Secretary-General Mohammad Barkindo said in Abu Dhabi. As for demand, “we’re beginning to see signs of deceleration in 2019. Now the result of that is projecting a buildup of stocks to the level we saw in 2014.”
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An agreed upon cut of 1 mb/d next month would take some of the excess out of the market, however, and the Saudi cut could go a long way towards building the will within OPEC+ to agree to such collective action. “The unilateral reduction in supply announced by Saudi Arabia should make it easier to agree on a general reduction at the early-December OPEC meeting and thus noticeably reduce the risk of an oversupplied market,” Commerzbank said in a note. “We therefore envisage further recovery potential for oil prices in the short term.”
The Saudis themselves aren’t exactly sure of what to expect. “We are going to be flexible,” al-Falih said at a conference in Abu Dhabi. “There are a lot of assumptions that may change in two to three weeks time.” He added that OPEC+ “will do what it takes,” which sounds like Riyadh is not interested in seeing Brent fall below $70 per barrel, about where it was trading this past weekend.
Sources told Reuters that Saudi Arabia was surprised that the U.S. government issued a series of waivers to importers of Iranian oil just as sanctions took effect. The waivers meant that a lot less Iranian oil is destined to go offline than was previously expected. Saudi Arabia and its Gulf allies ramped up production in anticipation of much larger outages from Iran. The waivers led to a fall in prices. “No one expected the waivers. Saudi Arabia wants to at least put a floor under oil prices. No one wants a free fall in prices,” an OPEC source told Reuters.
Not everyone agrees. At least one oil market watcher was not happy with the planned production cuts.
Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!
— Donald J. Trump (@realDonaldTrump) November 12, 2018