OPEC+ likely to extend output cut agreement: Analysts

Published: Updated:

The Organization of Petroleum Exporting Countries (OPEC) and non-member allies, otherwise known as OPEC+, are expected to keep their current output cut agreement in place, according to analysts.

But even if they were to deepen their production cuts, it may still not have a big impact on oil prices.

The oil producing nations are gathering in Vienna next week and industry analysts suggest that some of the biggest producers are in favor of prolonging the existing agreement of cutting oil output by 1.2 million barrels per day (bpd) until March 2020.

Deeper cuts, however, are not off the table, Emirates NBD Research said in a note. The Dubai-based bank sees OPEC+ slashing output by as much as 1.75 million bpd.

“We won’t completely rule out the possibility OPEC would agree to deeper cuts, but we are doubtful that it would be effective in raising prices that would come close to meeting fiscal breakeven levels in most OPEC producers,” Emirates NBD analysts said in a note.

Most Middle East economies rely on oil revenues to balance their annual budgets. For instance, OPEC leader Saudi Arabia would need the commodity to be at $88 a barrel next year, Emirates NBD said.

Even at higher cuts, OPEC+ would still endure market surpluses of nearly 800,000 bpd in the first half of 2020, before a deficit emerges in the second half, it added.

Most of this will come from US shale fields, which have become the engine for oil supply growth and represented about 98 percent of the world’s new crude output in 2018.

If an OPEC+ led rally does happen, “shale producers are likely to lock in prices by selling heavily on the futures market and boosting production,” said Jeffrey Halley from Singapore-based Forex trader Oanda Group.

“That will likely take us back to square one eventually,” he added.

A bigger cause for concern is falling demand. Energy importing countries across Asia and Europe are cutting their purchases of oil shipments in response to a global economic slowdown, exacerbated by the ongoing trade war between US and China.

“The most likely outcome for OPEC+ at their early December meeting is to maintain production cuts in place and hope for either demand to improve significantly or for alternative producers to falter,” Emirates NBD said.

Iran and Venezuela are out of the market due to US sanctions, while protests in southern Iraq are crippling some of the country’s main ports and oilfields, threatening oil exports, particularly to India.

An output cut of “another 300,000 to 400,000 bpd is unlikely to have a lasting effect on the oversupply of oil and prices in the medium to longer term,” Halley said.

“OPEC+ would need much deeper and more material cuts and then stick to them to more permanently boost prices. Either that, or a comprehensive Sino-US trade agreement that comprehensively boosts world growth,” he added.

Oil prices have already inched up to $64 a barrel this week on indications that the two countries are near to closing the first phase of a trade deal, which could see the roll back of some tariffs.