Talks of oil cuts are back already? Here’s why

November 13, 2018 9:00 am


With the rest of the US’ sanctions against Iran going into effect last week, Brent crude and WTI crude both took a hit of about $10 per barrel value.

Now, at the OPEC meeting in Abu Dhabi held this Sunday, Saudi has eased concerns by announcing that it is prepared to lower its oil production to help stabilize oil prices in the coming year if needed, as the market adjusts.

More supply, less demand

Following the four-year high during October when Brent Crude, the major benchmark price for oil purchases worldwide, reached $86.07 a barrel, why are there talks of cuts now all of a sudden? Wouldn’t sanctions on Iran mean that international production needs to be raised to fill the gap left by a lack of Iranian oil exports?

To understand the situation, we need to cover the OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC)’s meeting in Abu Dhabi that started this past Sunday.

The Committee reviewed current oil supply and demand fundamentals and noted that 2019 prospects point to higher supply growth than global requirements, taking into account current uncertainties. This counteracts the fears that had popped up ahead of the sanctions and loss of Iranian crude output.

The Committee also noted that the dampening of global economic growth prospects, in addition to associated uncertainties, could have repercussions for global oil demand in 2019 – and could lead to widening the gap between supply and demand.

The attending members boosted production since agreeing in June to increase supplies by a combined 1 million b/d from May levels to offset expected losses by sanctions-hit Iran and economically strained Venezuela, S&P Global reported. However, weaker market conditions have put the need to restrain output back on the group’s agenda.

Amrita Sen, chief oil analyst at Energy Aspects Ltd, echoed this sentiment: “With Iranian waivers coming in higher than anyone expected, Saudi Arabia is acting responsibly by reducing its production that it had earlier brought online to offset possible Iranian losses.”

Business Insider reiterates that OPEC and Non-OPEC countries had ramped up their production to mitigate the forecasted gap they had expected the sanctions to create, pumping at near-record levels. Figures suggested the three are producing 33 million barrels a day, or a third of the world’s oil.

READ: ADNOC CEO: Global oil consumption to break 100 mbpd milestone

Saudi taking charge of the situation?

(Graph by Bloomberg)

Saudi understands that something needs to be done about the current oversupply in the market in 2018 and in the coming year, and their oil output could soon reflect this.

Bloomberg reported that “Saudi Arabia expressed the need for oil producers to cut 1 million barrels a day from October levels and announced fewer shipments from next month, as OPEC and its allies began laying the groundwork to reduce oil supply in 2019, reversing an almost year-long expansion.”

“Saudi Energy will export 500,000 fewer barrels a day in December than this month, taking the lead in OPEC to counter the price rout battering the finances of group members and energy companies alike,” the publication continued. “While a meeting with other producers on Sunday yielded no change in supply policy, OPEC+ warned in a statement that it might need ‘new strategies,’ raising the prospect of a wider and coordinated cut in 2019.”

Saudi Arabia raised its production from around 9.9 million barrels per day in May to around 10.7 million bpd in October, according to Energy Minister Khalid al-Falih, AFP reported.

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Trump played his cards right, avoided international oil catastrophe

These proposed cuts have eased global concerns regarding a zero-out of Iran output in 2019 in the aftermath of the sanctions. Trump has played this particular diplomatic affair wisely, handing out much more waivers to countries like South Korea and India than initially expected, which has prevented the creation of a sudden output void in the market.

“I don’t want to drive the oil prices in the world up, so I’m not looking to be a great hero and bring [Iran oil exports] down to zero immediately,” Trump told reporters on Nov. 5 before flying to a campaign event, according to Reuters. “I could get the Iran oil down to zero immediately but it would cause a shock to the market. I don’t want to lift oil prices.”

This, coupled with Saudi and potential OPEC+ support to cut production, should allow the market to stabilize in 2019. However, Saudi can’t do this alone.

READ: Talks of oil cuts amidst low supplies! What is going on?

Saudi will need cooperation from fellow producers

Saudi’s attempts to stabilize oil prices is a step in the right direction, but it will need the support of other oil producers to bring balance to the market in 2019.

“We are going to do everything we can to keep inventories and supply demand fundamentals within a reasonably narrow band around balance, and we believe markets will calm down,” Saudi Energy Minister Khalid Al-Falih said today in a speech at the meeting in Abu Dhabi. “We are not in the business of pinpointing a price going forward.”

Falih told CNBC on the first day of the meeting that the market overreacted last month when it sent oil prices to four-year highs. He said the more than 20% pullback in prices over the last five weeks shows investors are now overreacting in the other direction.

According to Markets.com, Saudi Arabia cannot act alone though – realistically it needs to pull together OPEC allies and, critically, Russia to curb production if it wants prices to hold. The language from Russia suggests it is not ready to follow the Saudis yet.

Iraq might similarly resist the cuts, as Bloomberg reports that Iraq has successfully boosted production to a record, and its more fragile economy may make it loathe to reverse course.

Currently, Brent crude is going for $71.20/b, and WTI is going for $60.68/b. On Friday, WTI fell below $60 per barrel for the first time in this calendar year, OilPrice.com reported. Brent fell below $70, a month after its four-year high of $86.07/b in early October.

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Mark Anthony Karam
By Mark Anthony Karam
Journalist
Mark Anthony Karam has 3 years experience in the field of visual and written media, having earned his Masters degree from the UK. You can get in touch with him here: [email protected]



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