Oil production cuts loom

Opec and its allies are expected to roll over their existing production cuts, which expire in March 2020, for a duration of three months, with a possible extension towards the end of 2020, according to a report.
Opec+, a loose organisation of 24 oil producing nations led by Saudi Arabia and Russia, will meet in Vienna this week to discuss their existing oil output cuts and chalk out a future strategy to balance the market amid a global slowdown, shrinking oil demand and geopolitical tensions in parts of the region.
The group, which agreed to cut supply by 1.2 million bpd from January this year, will discuss three possible scenarios at the two-day meeting starting on Thursday.
Under a baseline scenario with a 60 per cent probability, an MUFG report said the Organisation of the Petroleum Exporting Countries (Opec) may extend existing cuts for a duration of three months to June 2020, with a possible extension of nine months to the end of 2020. As a result, oil prices may decrease $3-$5 per barrel and stabilise at around $60, which is close to the industry's marginal cost of production.
"The baseline scenario is in line with the group's desire to continue balancing the market given expectation of weaker demand, signs of shale activity slowdown and legacy as well as non-Opec projects coming online," said Ehsan Khoman, head of Mena Research and Strategy, MUFG Bank.
Under a bullish scenario with 35 per cent probability, the group may go for deeper cuts and announce production cuts ranging between 0.5 million bpd to 1.5 million bpd for three months. As a result, oil prices may decrease $3-$5 per barrel and stabilise at around $60, which is close to the industry's marginal cost of production.
"The baseline scenario is in line with the group's desire to continue balancing the market given expectation of weaker demand, signs of shale activity slowdown and legacy as well as non-Opec projects coming online," said Ehsan Khoman, head of Mena Research and Strategy, MUFG Bank.
Under a bullish scenario with 35 per cent probability, the group may go for deeper cuts and announce production cuts ranging between 0.5 million bpd to 1.5 million bpd for three months. As a result, oil prices may increase $5-8 per barrel and will help clear the supply glut next year.
"Our econometric models signal that Opec+ will need to extend and deepen the magnitude of cuts by a further one million bpd to 1.2 million bpd through the whole of 2020 to prevent a new supply glut from emerging," Khoman said, adding that this will move Opec+ closer to a balanced market but it may cause a considerable slowdown in the core Opec+ economies - Saudi Arabia, the UAE, Kuwait and Iraq.
Analysts said the Opec+ may well be tempted to follow a cautious approach in the wake of global slowdown and shrinking oil demand to ensure 'fair and stable prices' for petroleum producers. They said $60 a barrel is a comfortable price for the likes of Russia, whose 2019 budget is predicated on a price of around $42 a barrel, but it is too low for countries such as Saudi Arabia despite having some of the world's lowest production costs.
"The Saudi government needs a higher price in order to finance its budget and favours deeper oil cuts next year to clear supply glut," said an analyst.
Iraq Oil Minister Thamer Ghadhban on Sunday said Opec and allied oil producers will consider deepening their existing oil output cuts by about 0.4 million bpd to 1.6 million bpd.
On Tuesday, Russian Energy Minister Alexander Novak said Moscow is yet to finalise its position in talks on possible additional supply curbs.
"I will not tell you anything now as we are still finalising our position," Novak told reporters in Moscow. "Lets wait ... But I think the meeting, as usual, will be of constructive nature," he said.
On Friday, Novak said he would prefer Opec and its allies to wait until near April before making a decision on whether to extend the oil output deal.
Russia agreed to reduce output by 228,000 barrels per day (bpd) to about 11.18 million bpd in 2019 as part of cuts agreed by the group known as Opec+. But it pumped more than its quota in November, producing 11.244 million bpd.
Suhail bin Mohammed Faraj Faris Al Mazrouei, UAE Minister of Energy and Industry, said it is 'premature' for Opec+ to consider deepening cuts.
"It is too early to say if the Opec and its allies will intensify oil production cuts," Al Mazrouei told Khaleej Times on the sidelines of an award ceremony last month.
The MUFG Bank report also discussed bearish scenario with five per cent probability that no rollover of cuts will be announced and the group will return gradually to pre-agreement level that will help decrease oil prices by $5 a barrel.
Divided opinion
In a note on Tuesday, JPMorgan said Opec+ is expected to evolve consensus on deeper output cuts of 1.5 million barrels per day to the end of 2020 versus 1.2 million currently to help reduce a global supply glut.
"Saudi Arabia is seeking more cuts in order to ensure that oil prices are within the range of $60 to $70 a barrel which is where their oil fiscal budget break-even is," Christyan Malek, JPMorgan analyst, said in a note.
Another US investment bank Goldman Sachs on Monday said that Opec+ is likely to extend output curbs through June but expects the "uneventful" three-month extension to provide little support to prices due to a large increase in production from non-Opec projects. It said Brent is expected to trade around $60 a barrel in 2020 in the absence of geopolitical shocks.
Oil prices fell on Tuesday after US President Donald Trump said a trade deal with China could be delayed until after the next US presidential election. Brent futures fell 42 cents to $60.50 a barrel by 1448GMT. US West Texas Intermediate (WTI) crude was down 25 cents at $55.71.
"Our expectations are that oil markets will remain in significant oversupply next year, pressuring Opec+ to confront its long-term dilemma - defend prices (through lower output) or defend market share (through higher output)," Khoman said.
He said non-Opec supply - primarily in Brazil, Guyana and Norway, will increase 2.1 million bpd next year and offset lower US shale growth.
Junaid Ansari, vice-president at Kamco Research, said world oil supply witnessed a month-on-month growth of 1.67 million bpd during October and averaged at 99.34 million bpd.
"The increase in production came primarily on the back of higher production in the US, Canada, Norway, the UK, Australia, Kazakhstan, China and Opec NGLs. As a result of increase in its monthly production rate, Opec's market share increased by 50 basis points to 29.8 per cent during October 2019," Ansari said.
Mihir Kapadia, CEO of Sun Global Investments, said oil markets are firm as investors are encouraged by news of a possible trade agreement being reached between the US and China.
"Getting a deal in place sooner rather than later, will certainly help in bringing back some balance to the oil markets, especially ahead of Opec's meeting in Vienna this week where we will likely see stricter compliance to help establish greater order," he said.
— muzaffarrizvi@khaleejtimes.com