Energy Prospectus

OPEC+ Gravitates Toward Extending Oil-Output Cuts to Early 2020
Bloomberg
Javier Blas, Grant Smith and Nayla Razzouk, Bloomberg•June 30, 2019

Oil producers from the OPEC+ alliance are moving toward extending their output cuts for nine months into the first quarter of 2020, as they grapple with surging U.S. shale output and weakening growth in demand.

Since Russia and Saudi Arabia reached a deal on the margins of the Group of 20 summit on Saturday to roll over the curbs by six to nine months, other nations have voiced their support for an extension into next year.

“The longer the horizon, the stronger the certainty to the market,” OPEC Secretary-General Mohammad Barkindo said in Vienna on Sunday after meeting for breakfast with Khalid Al-Falih, the Saudi oil minister. “It will be more certain to look beyond 2019. I think most of the forecasts that we are seeing now and most of the analysis are gradually shifting to 2020.”

Nigerian and Venezuelan delegates also expressed their conditional support for a nine-month extension, which isn’t the OPEC policy playbook as traditionally the oil-club has aimed for half-year production deals. It remains unclear whether the proposal, which Al-Falih has said he favors, will win unanimous support from all of OPEC’s 14 members.

Until this weekend, OPEC officials had been discussing prolonging cuts through 2019. Yet Russian President Vladimir Putin -- after meeting with Saudi Crown Prince Mohammed Bin Salman -- opened the door to 2020 by mooting longer curbs. That reflects both strategy and tactics: it acknowledges the somber 2020 outlook for supply and demand amid slowing economic growth and rising U.S. output. And it allows OPEC to show the market it’s ready to keep cutting while retaining flexibility to tweak the deal when it gathers again before year-end.

“We think this is clearly a move orchestrated by Saudi Arabia to support current prices amid forecasts of lower demand, or at least try to keep a floor in place,” said Joe McMonigle, an energy policy analyst at consultants Hedgeye Risk Management LLC and a former senior official at the U.S. Energy Department.

Since Russia and Saudi Arabia came together to manage the market in late 2016, benchmark Brent crude has oscillated between $45 and $85 a barrel. On Friday, Brent futures for September closed at $64.74.

Brent is “more likely to open positively tomorrow” following the Russia-Saudi deal, Edward Bell, director of commodity research at Dubai-based bank Emirates NBD, said in an interview. Nevertheless, trade tensions and demand concerns will blunt rallies in the third quarter, he said.

Hours after Putin’s meeting in Osaka with Prince Mohammed, Al-Falih said that Saudi Arabia supported a nine-month extension but that “we have to talk to other ministers.” He warned that oil-demand growth had “softened a little bit,” but said there wasn’t a need to deepen the cuts.

Oil ministers from the Organization of Petroleum Exporting Countries are scheduled to meet on Monday in Vienna to discuss production policy. The following day, their counterparts from non-OPEC nations will join the talks. Saudi Arabia and Russia are the largest members in the group, and usually both nations are able to steer the OPEC+ alliance toward their preferred policy.

Yet, others may oppose. In the past, Tehran has fiercely opposed the position of Riyadh, which it blames for stealing Iranian market share. This time around, the Islamic Republic is contending with slumping crude exports as a result of U.S. sanctions that are crippling its economy.

For Moscow, however, there’s an extra incentive to extend the curbs by nine months as Russian oil companies struggle to raise production over the winter. By extending the deal into 2020, Russia could be in a better position to pump more during the spring of next year.

In any event, the group will convene again to review policy before next year. It’s likely to schedule its next meeting for December, according to Barkindo, who also said he expects his term as secretary-general to be renewed beyond its expiry in August.

The current version of the OPEC+ deal calls for production curbs of 1.2 million barrels a day, though the alliance has cut more than it pledged as U.S. sanctions on Iran and Venezuela slashed output from both countries. Saudi Arabia has also unilaterally made deeper curbs, pumping 9.7 million barrels a day in May, compared with its OPEC+ ceiling of 10.3 million.

Saturday’s deal to extend the cuts “paves the way for ensuring the interests of producers and consumers,” Saudi Arabia’s Al-Falih said in a tweet. “This will help reduce global stockpiles and thus balance the market.”

OPEC Live Blog: Bloomberg reporters and editors will be live-blogging on the OPEC meeting starting around 9 a.m. Vienna time on Monday July 1.

The possible problem is that agreed upon cuts again imply that the supply of oil is there if the world ever needs it from more demand.
With the ability of the US to seemingly increase supply easily and OPEC holding back production even with increasing demand energy stocks are unable to go up and that is what the stock prices have been telling us for a long time.
Hope wrong since I've got a bunch of energy stocks!!!

1. Per EIA U.S. crude oil production has declined by 300,000 barrels per day since May. See Saturday's podcast or you can go to EIA's website to verify this fact: https://www.eia.gov/dnav/pet/pet_sum_sn ... _nus_w.htm

2. It is a myth that U.S. oil production can continue to increase at the pace it has been on. Definitely not at today's active rig count. The more we depend on horizontal wells in tight oil plays the more new wells that will be needed each year to keep production flat. We will eventually run out of Tier One drilling locations and much higher oil prices will be needed to make Tier Two drilling programs profitable. I doubt we see a meaningful increase in the active drilling rig count until WTI is firmly over $65/bbls and maybe not even then because upstream companies are under a lot of pressure to hold down capex spending.

3. Without Iran's oil, the rest of OPEC cannot get back to where production was in Q4 2018. In Q4 there was no production quota agreement and OPEC produced 32.2 million barrels per day. If Venezuela holds production steady from where it is today (extremely doubtful) and with the U.S. sanctions against Iran taking 1.5 million barrels per day off the market, OPEC's maximum production capacity is 31.4 million barrels per day. Keep in mind that WTI was in the $64 to $76 range for the entire 3rd quarter last year and there was plenty of demand. Global demand for oil based products will be approximately 1.5 million barrels per day higher in Q3 2019.

"Our already upbeat global oil supply/demand model has recently become even more bullish due to potential supply reductions from five OPEC countries, including: Iran, Venezuela, Libya, Saudi Arabia, and the UAE. With recent events, we now expect global petroleum inventories to draw by an average of one million bpd over the next two years, with global inventories (on a days-of-consumption basis) set to fall to unprecedented extremely low levels in 2020. Furthermore, we expect OPEC excess capacity to fall to de-minimis levels by the end of this year!" - Raymond James April 29, 2019.

PS: Take a hard look at slide 5 in Saturday's podcast. "Actual U.S. oil production" is the blue line. Note that it peaked around 12.0 million barrels per day and then declined in Q1 2019. We only have actual production data through March. EIA's weekly reports grossly overstated U.S. oil production in Q1 and they are just now correcting the formulas they use to forecast oil production, which is why EIA's weekly production estimate has declined for three straight weeks. EIA has a long history of missing the change of direction in oil production because their forecast models "stick with the trend" for too long.