OPEC+ is considering deepening cuts by as much as 500,000 bpd, a more aggressive effort to head off a supply surplus in 2020.
The rumors from Vienna were swirling in the trade press on Thursday, with chatter about deeper cuts running as large as 800,000 bpd – dubbed a “Saudi surprise” – but with estimates running the gamut.
Ultimately, OPEC’s Joint Ministerial Monitoring Committee (JMMC) recommended additional cuts of 500,000 bpd when officials surfaced from closed-door meetings. The group also intends to reemphasize the need for all producers to comply with the production limits.
The move came somewhat of a surprise after the consensus leading into the meeting was that the group would simply extend the existing 1.2 mb/d of production cuts.
However, questions remain for Friday, such as whether the official production cuts rise from 1.2 mb/d to 1.7 mb/d, or does the 500,000-bpd figure somehow include the fact that the group was already producing under its ceiling. Ultimately, OPEC+ is already producing beneath its ceiling – would raising the cuts to 1.7 mb/d simply codify what the group is already doing? In that sense, is it really a deeper cut after all?
Also still to be worked out is how the 500,000 is divided up among all producing countries. Saudi Arabia, for instance, has as production limit at 10.3 mb/d, but has averaged just 9.8 mb/d this year. If the Saudi limit is lowered to 10.1 or 10.0 mb/d, the market wouldn’t even really notice the difference. Related: Iraq: The Next Great Threat To Global Oil Markets
Nevertheless, the apparent agreement to somehow cut deeper is a significant achievement. While there could be some fine print that mitigates the impact of the cuts, in terms of messaging and cohesion, the deeper cuts are not trivial. Also, there are press reports that suggest Saudi Arabia wants more rock-solid assurances from cheating members that they will comply. The new cuts may not even take effect until all members achieve full compliance.
While it remains to be seen how this will be enforced, there were press reports from this week that Riyadh offered a “quid pro quo,” which amounted to full compliance in exchange for deeper cuts. On the other hand, there was a separate report that suggested that Saudi Arabia threatened to flood the market if laggards did not boost their compliance.
The combination of carrots and sticks seems to have had the desired effect.
Meanwhile, it’s hard to ignore the elephant in the room – the Saudi Aramco IPO. Riyadh almost certainly had some extra motivation in achieving some sort of deeper production cut in an effort to boost oil prices, which would lead to a strong launch of Aramco’s shares. Shares have been priced at 32 riyals, or $8.53 per share, at the upper end of the consensus. That will raise around $25 billion and value the company at roughly $1.7 trillion. Related: Saudi Aramco Shoots For The Highest Possible Valuation
But there are plenty of risks in trying to engineer higher market prices and a higher share price for Aramco. Inflating the price only means that there is more room to fall, especially if the market perceives the company as overvalued. If shares fall from the IPO price, all the investors who bought in at the beginning would get burned. While overpricing can happen with any public offering, the Aramco IPO is so clearly driven by the political goals in Riyadh that it hardly inspires confidence. It’s not surprising that institutional investors are staying away.
Ultimately, the Saudi decision to limit the IPO to the domestic stock exchange and scuttle the international offering is evidence that global investors are highly skeptical of investing in a company with an opaque and subservient relationship to the sovereign, not to mention a great deal of geopolitical vulnerabilities. The oddity of Aramco is on display in Vienna – it may be asked to cut production because of the economic and political goals of the state.
In any event, OPEC+ could struggle to really move prices higher than where they are currently in the low-$60s. The roughly $3 price gain on Wednesday and Thursday might be the extent of it, and with gains already priced in, it’s unclear if there is more room to run.
OPEC+ will spell out more details on Friday.
By Nick Cunningham of Oilprice.com
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