Oil prices showed some signs of life this week after reports suggested that OPEC+ might consider deeper production cuts at the December meeting in Vienna.
Sources told Reuters that the group may announce larger cuts in response to weak demand. Still, it is far from a done deal. Reuters said that Saudi Arabia wants to first get the entire group to adhere to the existing cuts. Iraq and Nigeria, for instance, have produced in excess of their allotments.
The attack on Abqaiq meant that Saudi oil production plunged far below what it was allowed to produce under the terms of the OPEC+ agreement, although the country had exceeded 100 percent compliance for much of this year. “The Saudis want to prevent oil prices from falling. But now they want to make sure that countries like Nigeria and Iraq reach 100% compliance first as they have promised,” one OPEC source told Reuters. “In December we will consider whether we need more cuts for next year. But it is early now, things will be clearer in November.”
The report should be taken with a grain of salt. OPEC has a reputation of trying to jawbone the market, and the anonymous press reports that start off with “sources say” have become a familiar feature of the ups and downs over the last few years, particularly in the weeks leading up to a meeting in Vienna. The modest jolt to prices on Tuesday offer some evidence that the rumor mill still has some influence.
Moreover, prices fell back on Wednesday after Russia poured cold water on the idea. Russia’s energy minister said that nobody from OPEC+ had actually proposed production cuts.
Nevertheless, there are some reasons why OPEC+ might follow through on deeper cuts. For one, seasonal demand softens in the winter, so larger cuts would merely keep up with seasonal swings.
A second reason is that Saudi Aramco is desperately trying to edge up its valuation ahead of its initial public offering. The $2 trillion figure for the company has been panned as wildly optimistic. But Riyadh is trying to get bankers to sign off on a very large number, which could be greatly influenced by higher oil prices in the lead up to the IPO. The timing of the offering – later this year or early 2020 – likely means that it plays a big role in how Saudi Arabia approaches the OPEC+ meeting. Related: The U.S. Smashes Another Oil Export Record
Finally, the fundamentals suggest that more production cuts might be necessary. “It has been our view for some time now that OPEC+ will have to deepen its production cuts again in order to prevent an oversupply and price slide next year,” Commerzbank said in a note on Wednesday.
Most analysts see a supply surplus in 2020, in large part because of weakening demand. “Following the August data, our forecasts for y/y global oil demand growth stand at 0.65mb/d in 2019 and 1.18mb/d in 2020,” Standard Chartered said in a note. The demand forecast, particularly for 2019, is at odds with the more bullish outlook from the IEA, which pegs demand growth at 1 mb/d this year.
However, the IEA has repeatedly had to downgrade its demand estimate, and a growing number of analysts view the agency’s forecast as overly upbeat.
Standard Chartered added that because of weakening demand, the “call on OPEC” could decline by 310,000 bpd next year, which is another way of saying that OPEC might need to make addition cuts to output in order to avoid a surplus.
Notably, however, Standard Chartered said the reduction in the call on OPEC is “relatively modest.” That is because the bank also sees U.S. liquids growing at a slower pace than some others. Standard Chartered puts U.S. growth at 0.695 mb/d for 2020, which stands in stark contrast to the EIA’s 1.578 mb/d and IEA’s figure of 1.29 mb/d. Related: Is Eating Meat Worse Than Burning Oil?
The numbers vary, but the bottom line is that OPEC+ faces a conundrum – and it’s the same one that has bedeviled the group for several years. Should it cut deeper, which would require more sacrifice but might boost prices? Or, should it let the market crash, which would impact revenues but would force other high-cost producers out of the market? Over at Bloomberg Opinion, Julian Lee says the cartel should simply let the market crash because OPEC is propping up unviable U.S. shale companies.
But that seems unlikely. OPEC+ is stuck on its current course, and has spent years trying to build up credibility with the market regarding its plan on production cuts. As December approached, the groups seems destined to either cut deeper or extend.
Either way, with the meeting in Vienna about six weeks away, the most recent rumor is probably not the last.
By Nick Cunningham of Oilprice.com
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