The kind of OPEC output restraint we are reading in today’s tea leaves will help the market dig out from the 4th quarter surplus, but likely not lead, by itself, to a supply/demand deficit in 2019.
Massive Increase in Output Swells 4th Quarter Surplus
The increase in OPEC crude oil production in the fourth quarter of 2018 has been striking considering sanctions have been re-imposed on a key producer. Saudi Arabia and others went overboard in “replacing” Iranian crude or catering to President Trump’s entreaties. And, they did so when crude demand was especially weak. We estimate OPEC production has risen by 500,000 b/d between August and November even though Iranian production has fallen close to 700,000 b/d. That means the other Arab Gulf producers have lifted production by 1.2 million b/d. Saudi Arabia and the UAE account for almost 900,000 b/d. Libya’s recovery kicked in another 200,000 b/d, and the rest comes from small increases elsewhere. Meanwhile, due to hefty refinery maintenance, global crude oil demand has fallen by over 2.0 million b/d between August and November. So, OPEC, with the help of surging non-OPEC supply, has dug a deep hole in terms of oversupply in the fourth quarter of 2018.
There are still many decisions that will come to light tomorrow with regard to a likely OPEC+ agreement, but the tea leaves from today’s meeting suggest OPEC is considering a 1.0 million b/d production cut (not including probably another 200,000 b/d decline in Iran as santions continue to shake out). Russia might contribute an additional 150,000 b/d cut. These efforts could remove something close to 1.4 million b/d from the market in 2019.
If this production restraint is applied to the high November output, it would help the market dig out from under the fourth quarter surplus, but it would probably not lead to a supply/demand deficit in 2019. As shown in the following global oil balance table, which reflects lower OPEC and Russian output, we would still expect the market to carry a surplus of perhaps as much as 300,000 b/d in 2019. And if demand disappoints, then the surplus could be bigger. We will know more about volume, starting point, timing and participation tomorrow….