The Fuse

Wild Week Ends with 11th-Hour OPEC+ Deal

by Paul Ruiz | @pmruiz | December 10, 2018

In the highly-anticipated meeting of the Organization of the Petroleum Exporting Countries (OPEC) on Friday, the cartel and its non-OPEC allies agreed to cut production through the first half of 2018, a move intended to lift international oil prices after a 30 percent slide since early October. The announced reduction of 1.2 million barrels per day (Mbd) capped a busy week of last-minute negotiating, during which Russian Oil Minister Alexander Novak flew to St. Petersburg to gain Russian President Vladimir Putin’s final approval to participate in a cut. OPEC will contribute roughly 800,000 barrels per day (b/d) in reductions, and non-OPEC countries will add 400,000 b/d to the cut.

OPEC is responding to a looming period of oversupply that analysts say threaten to pull international oil prices below $50 per barrel. Last month, the International Energy Agency warned that production would exceed consumption through 2019 as demand growth in several non-Organization for Economic Cooperation and Development (OECD) countries slows and supplies from Saudi Arabia, Russia, and the United States offset declines from Iran and Venezuela. The anticipated build-up in OECD stockpiles is also applying downward pressure on prices.

“While the 1.2 Mbd cut may lack the shock-and-awe factor that many in the market were hoping for, the strong show of unity at the press conference should stem the recent downward spiral and inject some renewed optimism into the market,” RBC Capital Markets’ Commodity Strategist Michael Tran wrote in reaction to OPEC’s announcement.

At a press briefing Friday, Saudi Energy Minister Khalid al-Falih said Saudi Arabia’s December output will be 10.7 Mbd, down from 11.1 Mbd in November, and will fall to 10.2 Mbd in January.

Dramatic week

Friday’s agreement capped a tense week of conflicting reports about Russian cooperation in the agreement. Oil futures jumped Monday after Russia and Saudi Arabia tentatively agreed to extend their partnership in 2019. But Russian oil companies dragged their feet. “They have to stop doing this,” one OPEC official told The Wall Street Journal in frustration over the dramatic and highly uncertain backroom deal-making. “The lives of entire populations are at stake.”

The final agreement has Moscow contributing 230,000 b/d to the cut. Initially, industry sources reported that Russia was only comfortable committing to a reduction of 150,000 b/d. While several Middle Eastern producers were desperate to reverse the current slump in prices and use higher oil revenues to pay for government spending, analysts believe Russia is in a better economic position than the cartel as a whole. Moscow is running a budget surplus, and a weak ruble has blunted the macroeconomic effects of lower crude oil prices.

The deal announced in Vienna further solidified Saudi Arabia’s strategic partnership with Russia.

The deal announced in Vienna further solidified Saudi Arabia’s strategic partnership with Russia. The two countries now collectively produce one-quarter of the world’s crude supplies. This provides Russia with a newfound make-or-break status with OPEC deals. Over the past four years, the market has seen stronger ties between the two nations as more unconventional oil supplies come onto the market.

Libya, Venezuela and Iran were exempted under the deal that called for a 3 percent output reduction for all non-exempted OPEC nations. The Saudis successfully encouraged conflict-prone Nigeria to cooperate after al-Falih traveled to the capital Abuja to rally support last week. Libya, meanwhile, did not sign on to the final agreement. Its exports have been on the rise following political reconciliations among the country’s dueling governments.

OPEC was given some respite earlier in the week when the Canadian province of Alberta announced a 325,000 b/d reduction to help reduce 2019 stockpiles. But the cartel was blindsided on Wednesday when Qatar announced it would leave OPEC in 2019 to develop its gas exports. Accounting for less than two percent of OPEC’s total output, Qatar was among OPEC’s first members when it joined the cartel in 1961. Its decision to leave is thought to be more reflective of a strained economic and political relationship with Saudi Arabia than disagreement over oil policy.

Shifting alliances

On Twitter earlier this week, President Donald Trump blasted the cartel for making moves that would restrict global oil flows and raise prices. “The World does not want to see, or need, higher oil prices!” he wrote. A SAFE analysis this year found gasoline prices of $2.95 per gallon had already erased more than 36 percent of the individual gains resulting from the President’s 2017 tax cut legislation. As of Friday, the nationwide regular gasoline price was $2.43 per gallon, but prices are expected to rise again as OPEC’s cut takes full force early next year. Brent crude oil prices initially surged more than 5 percent on the day to $63.11 per barrel as of mid-morning Friday. West Texas Intermediate oil futures were also up 4.2 percent.

In Washington, the U.S. Congress is considering several bills to create a specific avenue for the Attorney General to pursue legal action against OPEC for manipulating markets. Called the No Oil Producing and Exporting Cartels Act (NOPEC), this bill, alongside the U.S. Senate’s recent decision to end American military and economic support for the war in Yemen, and the public outrage over the killing of journalist Jamal Khashoggi inside of the Saudi consulate in Istanbul was thought to apply pressure on the Saudis to resist an output cut.

In reaction to the announcement, Saudi Arabia’s Energy Minister speculated on U.S. oil producers’ reaction to OPEC’s announced cut. “I am estimating oil and gas producers in the U.S. are breathing a sigh of relief,” Khalid Al-Falih fathomed. “We are providing some certainty and visibility for 2019, so they can approve their budgets.”