OPEC+ to cut another 500K barrels a day
Reductions designed to keep price of crude above $50, could lift Houston energy sector
OPEC and Russia agreed Friday to a stronger-than-expected deal to further scale back oil production and help offset an oncoming glut of new crude flowing from
Texas shale and other non-OPEC countries.
The surprisingly deeper cutbacks, led by Saudi Arabia, are designed to keep crude prices from plunging below $50 per barrel and could help prop up a struggling Houston energy sector that has shed jobs and cut costs all year. The U.S. benchmark for crude oil jumped to nearly $60 a barrel Friday — its highest level since September missile attacks in Saudi Arabia — and settled at $59.20 a barrel.
“It’s also a good day for our friends in Oklahoma and Texas,” said Saudi Arabia’s new energy minister, Prince Abdulaziz bin Salman, after announcing the pact.
On paper, the deal follows the broad strokes of the agreement outlined earlier week, basically deepening the production cuts to 1.7 million barrels a day from 1.2 million at least through March. But what sent oil prices leaping was a commitment by Saudi Arabia to hold production some 500,000 barrels a day below its quota of 10.14 million barrels a day and similar commitments by previous quota violators such as Russia, Iraq and Nigeria to make additional cutbacks and comply with the agreement.
Ultimately, any long-term gains for oil prices will depend on the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, following through with their promis
es and working to balance oil supply and demand through the entirety of 2020, said Jamie Webster, senior director at Boston Consulting Group’s Center for Energy Impact in Washington, who attended the OPEC meetings in Vienna.
“The proof will be in the pudding though with how many barrels they actually take off,” Webster said.
OPEC+ is scaling back production again because of the ongoing U.S. shale boom — the United States has more than doubled its oil output since 2011 — and a wave of new oil coming online from non-OPEC nations such as Norway, Brazil, Canada and Guyana. The concern among OPEC+ members — and other producers as well — is the new supplies could send crude prices tumbling without intervention by the cartel.
Shale production is still growing, but at a much slower pace because of middling crude prices. Drilling activity and job counts have fallen through all of 2019. Houston oil field services firm Baker Hughes reported Friday that the U.S. rig count dipped below 800 active drilling rigs for the first time since March 2017 when the industry was beginning to recover from the last oil bust. The U.S. rig count has plunged by more than 25 percent in the last 12 months.
Saudi Arabia and OPEC helped trigger that last oil bust in late 2014 when they decided to increase production with the goal of killing the U.S. shale boom through a war of attrition. That plan eventually backfired as the shale sector survived the bust by becoming more cost efficient — despite more than 100 bankruptcy filings — while Saudi Arabia and other oil economies suffered from the crash in prices. Saudi Arabia now aims to prevent an oil glut and avoid a repeat of the oil bust.
Rystad Energy, a Norwegian consultancy, projects non-OPEC nations will add a record-high of about 2.25 million barrels of oil per day in 2020, which is more than double the anticipated demand growth projected for 2020. Rystad said OPEC+ would need to cut an additional 750,000 barrels a day to help stem the tide, and Saudi Arabia is banking on its extra voluntary reductions doing the trick. That remains to be seen.
For its part, Saudi Arabia also is seeking market stability and stronger oil prices because it is finalizing a limited initial public offering for its massive state energy company, Saudi Aramco. On Thursday, Aramco announced it priced its available shares at $25.6 billion, giving Aramco a total valuation of $1.7 trillion, which is more than five times the market value of Exxon Mobil.
The energy minister’s younger half brother, Crown Prince Mohammad bin Salman, desires an Aramco valuation of at least $2 trillion, and Abdulaziz predicted Friday it will rise to that threshold within a few months.
The other key to the deal was getting the other top player in OPEC+, Russia, on board. Russia’s production quota is falling only from 11.19 million barrels a day down to 11.12 million barrels, although Russia has been producing more than 11.2 million barrels a day of late. Russia had resisted scaling back its output any more, but a reduction of 70,000 barrels a day isn’t considered a particularly big ask.
Iraq’s and Nigeria’s quotas dip only slightly, but because they’ve violated their quotas, their compliance could mean a combined output cut of 200,000 barrels a day. The new Saudi energy minister has preached the need for honest compliance, and it was unusual for the energy ministers of both Nigeria and Iraq to participate in Friday’s news conference to emphasize their planned adherence.
“I restate Nigeria’s commitment to OPEC,” Energy Minister Timipre Sylva said. “Nigeria will fully comply.”
Iraq’s adherence to its quota is more uncertain, given its leadership void following the recent resignation of its prime minister amid political unrest and protests.
“We have faced problems — I have to be frank and clear about that,” said Iraq Energy Minister Thamir Ghadhban, confirming Iraq’s anticipated compliance moving forward.
Other key OPEC members, such as Kuwait and the United Arab Emirates, would absorb small reductions. And smaller producers such Oman and Algeria would cut about 10,00 barrels daily.
Meanwhile, OPEC nations Iran and Venezuela, which are exempted from the quotas, are near decades-low production levels because of U.S. sanctions and, in the case of Venezuela, its own geopolitical turmoil and economic free-fall.
jordan.blum@chron.com twitter.com/jdblum23