OPEC set to extend output cuts amid global headwinds

London, UK – Faced with slowing global economic growth and with abundant stocks putting pressure on oil prices, the OPEC group of oil producers and its partners are set to maintain production cuts when they meet in Vienna on Thursday and Friday.

The cuts of 1.2mn barrels per day from October 2018 levels were originally fixed in December last year and were already extended at OPEC’s last meeting in June.

They are currently due to remain in effect until March 2020 and could be extended ‘until June, the date of the next summit’, said Tomas Varga, analyst at PVM. According to Andy Lipow from Lipow Oil Associates the cuts could even be drawn out ‘until the end of 2020’.

OPEC’s Economic Commission Board - which is a strong indicator of the bloc’s direction-said last week that maintaining cuts into 2020 would lead to a ‘balanced’ market. The organisation’s members may well be tempted to follow a cautious course by a forbidding global economic context.

The trade war with the US is acting as a drag on growth in China, normally an avid consumer of oil, while the European economy is also currently stagnating.

Moreover, the output of oil producers outside OPEC is breaking records: The US has been the world’s biggest producer since 2018, Brazil and Canada have also increased output and others such as Norway are planning to do so.

Oil prices have held relatively steady since the last OPEC meeting, with a barrel of Brent crude hovering around the US$60 mark, apart from a spike in September sparked by attacks on Saudi oil installations.

While this is a comfortable price for the likes of Russia, whose 2019 budget is predicated on a price of around US$42 a barrel, it is too low for countries such as Saudi Arabia. The Saudi government needs a higher price in order to finance its budget, despite having some of the world’s lowest production costs.

The big unknown in the runup to the meetings has been the position of Russia. Russia has regularly been exceeding the limits foreseen under the last deal, as have Iraq and Nigeria.

Saudi Arabia meanwhile has stayed within the quota it had been assigned and in September urged its partners to do likewise.