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All’s well that ends well: An OPEC+ agreement at last

It was always going to be a tough meeting for OPEC in Vienna this month, but few thought it would be that hard. 

On Wednesday night, ministers’ faces were solemn when they left a meeting of the Joint Ministerial Committee, the body tasked with overseeing an “agreement of cooperation” between OPEC and a group of allies — together known as OPEC+ — and which is led by the Saudi and Russian energy ministers. 

The next day, OPEC did not reach an accord among themselves and broke without a deal for the first time in nearly five years. All eyes were then on Friday’s meeting of OPEC+. It went down to the wire.

The gathering took place against the backdrop of oil prices having fallen a good 30 percent from more than $86 in early October. The US president, who is a big proponent of low oil prices, frequently took to Twitter — first lambasting OPEC when prices were high, and then encouraging the organization, and Saudi Arabia in particular, to keep them low. 

Physical markets were taken aback by the US granting waivers on the Iran sanctions to the eight largest importers of Tehran’s crude. The Gulf OPEC members and Russia had pumped full throttle in anticipation of the sanctions, which came into force on Nov. 4. Iran exports had come down just shy of 1 million barrels per day (bpd) since the sanctions were announced — with a potential further 1.5 million bpd to go. While Iranian exports are currently down, they will increase again in the New Year when the waivers for the eight countries come into force. 

Production from the US has also surprised on the upside, with the US becoming a net exporter of crude and products for the first time in seven decades. In other words, there is again a supply overhang in the market. At the same time trade wars and a general slowdown of the global economy may mean that demand growth will slow. According to the IEA, OECD stocks went up by 58 million barrels in the third quarter of this year. Various sources estimate the supply overhang in the first quarter of next year to be between 1.3 million and 1.6 million bpd — or even higher.

Markets will therefore benefit from decisive action by OPEC+. As for OPEC itself, the group was walking a tightrope between cutting sufficiently to stabilize the price, and not too much as to unleash a Twitter storm by US President Donald Trump. JP Morgan analyst Abhishek Deshpande coined this sweet spot a potential goldilocks outcome of the meeting. The three leaders Donald Trump, Vladimir Putin and Crown Prince Mohammed bin Salman — all present at the recent G20 meeting in Argentina — are at least aware of each other’s position. 

The going was tough at this week’s OPEC meetings as several countries — including Iran — demanded exemptions from the cuts. The other question was where the baseline should be: November 2018, when most producers pumped at record levels, or an earlier date?

In the end, the meetings showed the art of the possible, with a sizeable 1.2 million bpd cut — 0.8 percent from OPEC itself, and another 0.4 million from its allies. Russian Energy Minister Alexander Novak cited difficulties in winding down production in the winter months, but in reality there are powerful voices among Russia’s oil companies, who want to use their new-built capacity. 

This outcome will give some temporary respite to the market, which rallied on the news of the deal on Friday. First and foremost it proves the importance of OPEC+ when it comes to the overall aim of balancing the markets. This makes sense in light of the newfound might of US oil production. It also proves that Russia has become a powerful voice at the table in the two years since OPEC+ was first formed.
Last Modified: Saturday، 08 December 2018 01:19 PM
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