OPEC+ agrees to extend oil output cuts
Move is meant to stabilize markets, prevent global glut
OPEC, Russia and their allies agreed late Monday to extend their oil output cuts through March in their latest bid to stabilize energy markets and help prevent another global oil glut.
The decision to extend the cuts into next year, instead of the end of 2019 as initially anticipated, showed the cartel’s concern that global demand for oil would weaken well into 2020. The Organization of the Petroleum Exporting Countries will cut output by a combined 1.2 million barrels a day, the levels adopted at the end of last year.
The extension was considered necessary to prevent crude prices from plunging and possibly trigger another oil bust just a couple of years after the last one ended, analysts said. The extension of the production caps is critical to the Houston oil and gas industry, which is feeling the squeeze from lower-than-expected oil prices, disenchanted investors and shrinking budgets.
“The commitment to a nine
month extension is unequivocal,” said Khalid Al-Falih, the Saudi Arabian energy minister at a press conference. “Oil inventories have gotten out of our hands the last few months. What’s important is going forward we’re going to bring the inventories down.”
Oil prices rose modestly on the OPEC agreement, which was widely expected. Crude settled in New York $59.09 per barrel, up 62 cents.
The fears of another oil glut are largely the result of the continuation of the shale drilling boom in the United States, which has lifted U.S. output to record highs, and a global economic slowdown, caused in part by the ongoing trade war between the U.S. and China. The two countries, the world’s largest economies, said over the weekend they would resume negotiations to end the conflict.
U.S. oil production growth alone is forecast to outpace global oil demand growth in 2019. Al-Falih said OPEC will tweak its output as needed to adapt for U.S. production until the shale boom has run its course. When that might occur remains a big question.
“I have no doubt that the U.S. production will peak, plateau and decline just like every other basin,” Al-Falih said.
A ‘doozy’ coming
OPEC will next meet in early December to evaluate the state of the world’s oil markets and consider its next steps.
“The next meeting could be a doozy, as an oversupplied 2020 will be a more imminent and ominous thing,” wrote analyst Paul Sankey of the Japanese investment banking firm Mizuho. “Russian oil companies will be chomping at the bit after a full year of involuntary restraint.”
The outcome of the semiannual meeting appeared all but assured over the weekend when Russian President Vladimir Putin and the Saudi Crown Prince Mohammed bin Salman struck a deal at the G-20 meeting in Japan to extend the combined production cuts of 1.2 million barrels a day. Russia and Saudi Arabia are the biggest producers in the expanded cartel known as OPEC+.
The Russian energy minister, Alexander Novak, eased any doubts of an agreement early Monday by announcing the extension would run for nine months instead of six. The Iranian oil minister Bijan Zanganeh quickly said his country would go along with the plan.
The agreement, of course, doesn’t mean everyone is happy in the Middle East. Iran remains bitter rivals with Saudi Arabia and the United Arab Emirates for influence in the region as they fight a proxy war in Yemen. Tensions between the countries were heightened recently by the bombing of oil tankers in the Strait of Hormuz, as well as by Iran shooting down a U.S. drone.
Despite going along with the deal, Iran’s Zanganeh was perturbed by both Russia’s growing influence within OPEC as well as the perceived pushiness from the Saudis and the UAE. If Iran’s interests continue to be challenged by its two OPEC rivals, he warned, the cartel could dissolve amid growing discord.
Lots of laughs
The OPEC+ group is expected Tuesday to formalize a non-binding charter to make the expanded cartel official. The Saudis, however, had to emphasize that the OPEC+ charter with Russia would not supersede the original OPEC or its decision-making process.
“We took lunch, we took breaks, we prayed. It was not what you think. We were laughing and joking and clapping,” said Al-Falih, attempting to diffuse the internal conflicts.