The Fuse

OPEC+ With Plenty To Chew On Ahead Of December Meeting

by Alex Adams | @alexjhadams | October 29, 2019

As part of their agreement to collaborate on production cuts, the Organization of the Petroleum Exporting Countries (OPEC) and its OPEC+ petrostate allies like Russia agreed to revisit and assess their coordinated output curbs on December 5-6. There are several notable items the OPEC+ group will likely consider leading up to their December policy review.

The first is the effects of the cuts on the countries themselves. The International Monetary Fund (IMF) said Monday that the OPEC+ agreement to cut 1.2 million barrels per day (Mbd) from the global oil market is weighing heavily on economies in the Persian Gulf region, whose growth will more than halve this year in comparison to 2018.

The IMF said the gross domestic product of the six countries that make up the Gulf Cooperation Council (GCC)—Oman, Saudi Arabia, Qatar, Bahrain, Kuwait and the UAE—will grow 0.7 percent in 2019, down from the 2 percent recorded in 2018. As recently as April of this year, the IMF had predicted 2019 GDP growth of 2.1 percent.

Across the Persian Gulf in Iran, the outlook is even worse. Although exempted from the cuts—alongside Libya and Venezuela—the country would need oil priced at $194.6 per barrel in order to balance its 2020 budget.

A further influential factor is the slowdown in oil output growth in the United States

A further influential factor is the slowdown in oil output growth in the United States. Production increases have been offset by falling energy prices, with U.S. oil prices down 17 percent—and natural gas prices down 31 percent—compared to 12 months ago. As a result, calls from investors for greater returns have been growing, as they prepare for poor third-quarter earnings from American shale companies.

In addition, domestic production growth is set to slow, rising by 900,000 barrels per day in 2020 to 13.2 Mbd, down from an increase of 1.3 Mbd this year, according to forecasts from the U.S. Energy Information Administration. “We will continue to see growth, but it will be decelerated, and meaningfully decelerated from where it has been for the last three years,” said Bobby Tudor, chairman of Tudor, Pickering, Holt & Co, in an interview with Reuters earlier this month.

Big Oil is also unlikely to escape the fallout as slumping energy prices and sluggish global demand take their toll on results. The supermajors of ExxonMobil, Royal Dutch Shell, Chevron, Total and BP are expected to disclose a 42 percent fall in third-quarter earnings, on average, when they post their results this week.

Russia’s energy ministry said yesterday that OPEC and its allies will factor in the slowdown in U.S. production when they meet in December. “If you look at the U.S. you’d… see quite a pronounced slowing down of production growth in the past three to four months,” said Pavel Sorokin, the Deputy Energy Minster of Russia, one of the two most influential OPEC+ members, alongside de facto OPEC leader Saudi Arabia.

However, Sorokin still believes it is too early to talk about production cuts that run deeper than the current 1.2 Mbd. “The OPEC+ mechanism has shown it is efficient, but it is not efficient infinitely,” Reuters reported him as saying.