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How Much Does OPEC Need To Cut To Balance The Market?

OPEC will probably agree to cut production to the tune of between 1 and 1.5 million bpd, analyst Johannes Benigni from Austrian JBC Energy Group told CNBC, adding there was clearly a glut on global oil markets at the moment and such a cut would likely help the market to return to balance.

“OPEC will probably manage to stabilize the oil market by choosing the right language,” Benigni said. “They will indicate a cut of between 1 million and 1.5 million, and that will do, the market probably will stabilize.”

It’s somewhat surprising how fast the market swung into excess after in June, OPEC and Russia agreed to stop cutting production and to begin to ramp up as prices climbed to uncomfortably high levels for some major importers. This month all three biggest producers globally hit new records, with Saudi Arabia’s daily production rate exceeding 11 million bpd for the first time ever. Related: $50 Oil Puts Shale To The Test

The latest production data from the Kingdom, Russia, and the United States has pressured prices in addition to gloomy demand outlooks, and the talk about production cuts started by Saudi Arabia has not been able to apply sufficient counter pressure.

Yet if these talks end with a decision to start cutting, price movement could be reversed. What’s more, the glut is not across all grades, according to JBC Energy Group’s chairman said.

“What really are in oversupply are the light crude barrels which are coming out of the U.S.,” he said. “So the expectation or the hope for OPEC right now would be that prices go lower, and demand may come back.”

But others are skeptical that this will be so easy to do. In a note to clients, Jefferies said today “The oil price correction has become a rout of historic proportions,” as quoted by Reuters. “The negative price reaction is as severe as the 2008 financial crisis and the aftermath of the November 2015 OPEC meeting, when the group decided not to act in the face of a very over-supplied market,” the investment bank said.

By Irina Slav for Oilprice.com

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  • Mamdouh G Salameh on November 27 2018 said:
    OPEC need not cut any production. If the global oil market swung into excess after Saudi Arabia and Russia added 650,000 barrels a day (b/d) to the market in June, then withdrawing these 650,000 b/d from the market will be the answer.

    Analysts are starting to project how much OPEC should decide to cut as they exactly did how much oil exports Iran will lose as a result of US sanctions. In the case of OPEC, they are projecting cuts between 1 million barrels a day (mbd) and 1.5 mbd to balance the market. In the case of US sanctions, they projected that Iran will lose between 500,000 b/d and 1.5 mbd. They got it wrong and Iran has yet to lose a single barrel from its oil exports. They will also get it wrong with their projections about how much OPEC will decide to cut production.

    You shouldn’t bank on OPEC deciding to cut production in its December meeting. The overwhelming OPEC members could be against any new cuts. Instead, they will demand that Saudi Arabia and Russia withdraw the 400,000 b/d and 250,000 b/d they respectively added to the market and return them to the previous 1.8 mbd cut under the OPEC/non-OPEC agreement. In so doing, the glut in the market will ease. Libya will also have to cap its production at 1.2 mbd if it is to continue to be exempted from the production cut agreement.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • zorro6204 on November 27 2018 said:
    “The oil price correction has become a rout of historic proportions"

    Well, if you measure it off that brief peak of irrational exuberance, yeah. But that was very short lived.
  • Snorre on November 28 2018 said:
    As long as Donald is president it doesn't matter how much they cut. Donald will give more waivers to import from Iran if the price gets to high.

    Snorre
  • rjs on November 29 2018 said:
    i have no idea where this oil glut myth is coming from...the Monthly Oil Market reports for November from both OPEC and the IEA both showed that demand exceeded supply for each of the past 7 months, and was also expected to for the next two, as the 4th quarter is historically the demand peak...even with record production, there was global shortfall of around 220,000 barrels per day in October...

    so if they cut, we'll have a real shortage..

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