The OPEC+ decision to cut crude oil output by 1.2 million b/d (from October) should be enough to balance the global oil market for the next six months, and possibly the entire year if extended. Yet, it will not fully counteract the surplus that accumulated in the latter half of 2018. So, while this agreement is clearly supportive of prices, the magnitude of the upside in 2019 will depend on compliance with the agreement, future changes to Iran sanctions waivers, product demand growth meeting expectations, and IMO preparations later in the year.
OPEC+ Digs out of Surplus Early in 2019
OPEC and its partners have agreed to cut production by 1.2 million b/d from an October 2018 baseline, with OPEC cutting output by 800,000 b/d, Russia cutting by 250,000 b/d, and other non-OPEC partners contributing the rest of the cuts. Three OPEC countries are exempt from the cuts: Iran, Libya and Venezuela. The cuts will begin in January and initially last six months; OPEC+ will review the production deal in April and decide whether to extend them. It is not coincidental that the Iran sanctions waivers will be up for renewal or revision at about the same time. The volume of the cuts decided today are in line with our expectations, but it is significant that the cuts will be measured from an October baseline, because participating OPEC members’ production was nearly 500,000 b/d lower in October than it was in November. Assuming production continues to slide in Iran and Venezuela, in the first half of 2019 OPEC will remove nearly 1.5 million b/d of crude oil from the market compared to October.
Russia’s 250,000 b/d cut still enables producers in that country to produce 235,000 b/d more than they did under the previous OPEC agreement and 200,000 b/d more than they did just six months ago. If, following the last agreement, it took Russia a good six months to implement their 300,000 b/d cut, this time Russian producers are probably capable of reaching full compliance a few months from now, in March.
While Russia’s cuts may lag behind, if OPEC cuts output as promised in the first quarter, they will successfully stop the accumulation of new surplus, even if they do not fully drawdown the surplus that appeared in the fourth quarter. This is clearly supportive to prices, but the magnitude of the upside will depend on strict compliance, and demand rebounding a bit from 2018 weakness.