World’s top oil producers to deepen output cuts until March
However, Russia’s baseline will decline due to the exclusion of oil condensate
The long-awaited OPEC+ meeting has resulted in extra 500,000 bpd of oil cuts, which are aimed to neutralise oversupply risks in the first quarter of 2020. However, Saudi Arabia has failed to extend limitations beyond March, while Russia and other countries have received the right to exclude gas condensate from their calculations reducing the baseline for cuts.
Oil-producing countries led by Saudi Arabia and Russia agreed on Thursday to cut output by an extra 500,000 bpd in the first quarter of 2020, reports Reuters. The total volume of the new combined cuts amounts to 1,7 million bpd or 1,7% of global production. “We really do see some risks of oversupply in the first quarter due to lower seasonal demand for refined products and crude oil,” said Russia’s Minister of Energy Alexander Novak after the Thursday meeting, which lasted nearly six hours.
The agreement represents a compromise between OPEC kingpin Saudi Arabia and Russia, as according to Reuters’ sources, Moscow was reluctant to deepen cuts while Riyadh wanted them deeper and longer. Some OPEC ministers proposed extending the deal until June or December 2020 arguing that a slowing economy could hurt demand. Saudi Arabia is especially interested in higher oil prices on the threshold of the initial public offering (IPO) of its state crude producer Saudi Aramco.
“Saudi Arabia is pushing for deeper cuts to try and shore up prices. However, deeper compliance is imperative and hence the deal will last only for one quarter so that they can assess compliance then,” considers Amrita Sen, co-founder of Energy Aspects market research consultancy. The kingdom is currently cutting more than required to help the alliance meet its overall target, while some countries, such as Iraq and Nigeria, are cutting less then they pledged. Three other OPEC members (Iran, Libya and Venezuela) are exempt from the deal due to serious economic issues. The countries involved in the agreement account for over 40% of the world’s oil, but the world’s biggest producer, the United States, is not taking part in cuts. The latter is expected to further increase its output, as well as other non-OPEC producers Brazil and Norway.
OPEC also agreed to allow all OPEC+ members to exclude gas condensate, which is a by-product of gas production, from their oil output calculations, as the cartel itself does not take it into consideration. The exemption will let Russia exclude about 760,000 bpd of condensate from calculations. Thus, Russian baseline production used for cuts would decline from 11,42 million to around 10,66 million bpd.
According to Alexander Novak, OPEC+ producers will meet to discuss further cuts in March, when factors could include the run-up to November’s US presidential election.