PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 24 Jan 2020, 2:52 PM


Oil & Gas - OPEC+ Implementing Bigger Supply Cuts

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OPEC and non-OPEC members (OPEC+) through the recent meeting in Vienna (5 - 6 Dec 2019) have officially agreed to extend oil output cuts until March 2020. While the cuts are in line with market expectations, the additional 500,000 bbls/day offered caught many by surprise as the initial thought was that the Group would maintain supply curbs at 1.2 mbbls/day. These additional cuts will now lead to total adjustments of 1.7 mbbls/day. The effective time frame is just for the first three months of 2020 nonetheless, shorter than the six or 12 months implemented in the previous deal hence producers will meet again in early March to assess the impact and decide on the next move. This development provides a sigh of relief to the market as action has now been taken to provide stability and support to prices in view of a growing imbalances between global oil supply and demand in 2020 and the increase oil price volatilities. The OPEC+ which includes Russia and Kazakhstan possesses unprecedented influence over the world economy, pumping over 40% of the world’s oil. We reaffirm our Overweight stance on the sector.

  • Bigger cuts will be implemented. The OPEC+ meeting outcome was in line with market expectations with the extension of the oil output cuts to next year. The allies had even agreed to throttle output by an additional 500,000 bbls/day to 1.7 mbbls/day (c. 1.7% of global demand), surprising the market from the initial thought of the same 1.2 mbbls/day. The effective time frame is just for the first three months of 2020 nonetheless, shorter than the six or 12 months implemented in the previous deal. Producers will meet again in early March. Of the 500,000 bbls/day, OPEC will shoulder 372,000 bbls/day and non-OPEC producers an extra 131,000 bbls/day, bringing the total reduction to 1.17 mbbls/day for OPEC and 531,000 bbls/day for the non-OPEC members led by Russia. Iran, Libya and Venezuela remain exempted.
  • Saudi to maintain its voluntarily restrictions. Several participating countries, mainly Saudi Arabia, will continue with their additional voluntary restriction of 400,000 bbls/day, leading to an aggregated global production curb of 2.1 mbbls/day since the collaboration started in 2017. Russia is also affirming its quota of 300,000 bbls/day in the first three months of 2020 meanwhile. Thus far, the level of compliance to the arrangement has been inspiring at an average of 146% by OPEC members and 110% by non-OPEC group over a 10-month period. Saudi Arabia’s average compliance is the highest within OPEC members at 271% though recent attacks on its energy infrastructure in September did push the kingdom and OPEC’s oil production cuts into overdrive.
  • Our views. To recap, OPEC+ agreed last year to reduce volumes by about 1.2 mbbls/day to eliminate a surplus and bolster crude prices. In reality, the alliance has cut far deeper for most of 2019 due to a combination of voluntary and involuntary measures. The group’s Joint Technical Committee concluded that supply reductions have exceeded that target by about 40% in October, equivalent to about 500,000 bbls/day in additional curbs. As such, we do not see the recent decision by OPEC+ to cut the additional 500,000 bbls/day to lead to higher oil prices, but rather to provide stability and support to oil prices ahead of expected output increases next year by countries not participating in the cuts led by the world’s top producer, the US.

Source: PublicInvest Research - 9 Dec 2019

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