December 09, 2019

Staring At Oil Market Glut, OPEC Sources Hint At Unlikely Output Cut

Staring At Oil Market Glut, OPEC Sources Hint At Unlikely Output Cut


As the 14 members of oil producers’ group OPEC and their 10 non-OPEC allies prepare to meet – in Vienna, Austria on December 5-6 – to make a call on an output cuts pact of 1.2 million barrels per day (bpd), another oil market glut is appearing on the horizon.

According to the International Energy Agency (IEA), non-OPEC countries will alone add another 2.3 million bpd to their supply in 2020, while global oil demand growth is expected to be typically around 1.2 million bpd.

Courtesy a Reuters analysts’ poll, either side of IEA’s demand growth forecast are optimistic projections of 1.4 million bpd and more conservative projections of 0.8 million bpd.

The range is unsurprising in the wake of the ongoing U.S.-China trade tiff and concerns over the direction of the global economy, even if fears over a global recession have eased of late. And even the upper end of the demand growth projections wouldn’t do much for OPEC’s so-called “market re-balancing” attempts.

Despite a possible slowdown in U.S. oil production, the IEA has been at pains to hint the Americans aren’t the only non-OPEC talking point around in relation to a possible 2020 glut, with additional barrels expected from Brazil, Canada, Guyana and Norway.

Its conclusion: “The hefty supply cushion that is likely to build up during the first half of next year will offer cold comfort to OPEC and its allies,” and that the U.S. too will continue to pump more than it has in recent years.

OPEC’s response has been a typical drip feeding of hints at a possible deepening of the cuts in the run up to the ministers’ meeting. The existing cuts are in place until March 2020, and a rollover has been largely priced in by the market. But true to OPEC form, the pre-meeting “surprise”, if you can call it that, has been hints at upping the cut by 400,000 bpd to 1.6 million bpd until June.

Typically both on and off record quips form the order of the proceedings. On Sunday (December 1), Iraqi oil minister Thamir Ghadhban suggested OPEC members were considering the figure. Promptly, on Monday morning “two sources” also told Reuters the size of the cuts may well be increased.

I remain deeply skeptical that OPEC and its allies can increase their level of cuts. Even if the producers’ group acknowledges there is plenty of oil out in the market, its own desire not to lose further market share and monetize its barrels at current levels would be too strong an urge.

A major sticking point is the persistent failure of Russia – the biggest of the 10 non-OPEC producers participating in the cuts – to meet its end of the bargain, if calculations by data aggregators are anything to go by.

According to Bloomberg, Russia produced 11.244 million bpd on average in November, despite promising to keep its quota at or below 11.191 million bpd. Number crunchers at Reuters, using a ton/barrel ratio of 7.33 to convert official Russian government production data, said the country actually pumped 11.25 million bpd, but should cap output at around 11.17-11.18 million bpd under its OPEC+ pact.

Only in May, June and July, was Russia’s output anywhere below its OPEC+ target largely down to the Druzhba oil-contamination crisis. However, what the market can possibly expect from Russia is meaningless lip service to Saudi Arabia ahead of the Aramco IPO.

None of this would address concerns over an oil market glut, and a rollover or even an unlikely deepening of the cuts by 400,000 bpd is not going to go a long way in 2020. Therefore, there are hardly any reasons to be optimistic on the oil price beyond $60-65 per barrel using Brent as a benchmark.

The above commentary is meant to stimulate discussion based on the author’s opinion and analysis. It is not solicitation, recommendation or investment advice to trade oil and gas futures, options or products. Oil and gas markets can be highly volatile and opinions in the sector may change instantaneously and without notice.



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