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Why The OPEC+ Pledge Is More Bullish Than It Seems

Saudi Arabia shocked the oil market on Friday, with its energy minister Prince Abdulaziz bin Salman pledging to voluntarily cut even more oil production than its new quota, according to S&P Global Platts.

Under the existing oil production quota, Saudi Arabia had agreed to keep production under 10.311 million bpd—a cut of 322,000 bpd. But on Friday, OPEC divvied out an additional 372,000 bpd of cuts to its members, with Saudi Arabia’s new production cap coming in at 10.145 million bpd—an additional cut of 166,000 bpd.

But Saudi Arabia is planning to do more than even that—planning to keep its production at or below 9.744 million bpd. For reference, Saudi Arabia’s production for October was 9.890 million bpd, so this new voluntary pledge to cut even more than the group had asked it to is even more of a reduction.

If all members, including the non-OPEC side which must cut an additional 131,000 bpd, stick to their new production quotas including Saudi Arabia’s voluntary cuts, it would mean a total of 2.1 million bpd in restrictive oil production.

Related: The Toughest Part Of The OPEC Deal

The fact that Saudi Arabia was willing to shoulder even deeper cuts than it was asked to is telling of the position of the Kingdom, who has long carried the production cut deal nearly singlehandedly, motivated by its upcoming Aramco IPO, which depends significantly on oil prices.

As additional motive for Saudi Arabia and the cartel to agree on a deeper production quota despite losing market share by doing so is the expectations of depressed demand growth going forward, which is expected to continue to weigh on oil prices without additional supply restrictions.

The news of an OPEC win and the Saudi Surprise has already started to lift oil prices, with WTI and Brent up roughly 1.3% and 1.6% respectively by 2:15pm EST.

By Julianne Geiger for Oilprice.com

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  • Mamdouh Salameh on December 07 2019 said:
    It is a situation when cuts are not cuts. The pledged cuts of 500,000 barrels a day (b/d) can hardly be considered real cuts as they will go mostly towards offsetting 400,000 barrels a day (b/d) being resulting from Iraq's and Nigeria's failure to comply with their shares under the OPEC+ production cut agreement.

    Saudi Arabia was motivated to agree to these so-called cuts for two reasons. The first is that it can no longer sustain a production of 10 million barrels a day (mbd) since its production peaked at 9.6 mbd in 2005 and has been in steady decline since then. The claim that Saudi Arabia was producing some 10.311 mbd means that more than 1 mbd has been sourced not from real production but from stored crude oil.

    The second reason is that Saudi Arabia needs oil prices higher than $60 a barrel to get better share prices for its domestic IPO.

    Still, the so-called OPEC+ cuts will have a very marginal impact on prices. The reason is the trade war continuing to widen a glut in the market estimated at 4.0-5.0 mbd. As a result, OPEC could lose more market share.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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