VIENNA – OPEC and its non-OPEC partners agreed Friday to extend its production cuts cooperation into 2019 and cut 1.2 million barrels per day (b/d) for the first half of the year. This is in line with Hedgeye’s earlier forecast of 1.1 million b/d in OPEC+ cuts.
The OPEC action will address an estimated oversupply of 1.3 million b/d in the first half of 2019. The second half of 2019 is forecasted to be closer to balance.
While the headline cut number is 1.2 million b/d, it is important for the market to recognize other factors will translate into significantly higher cuts that we think equal at least 1.6 million b/d:
- Iran involuntary cuts from US sanctions – estimated by Platts to be 300,000 b/d in November and will likely go higher.
- Venezuela declines in production – projected to be approximately 150,000 b/d by January.
- Saudi Arabia’s Energy Minister Khalid al-Falih announced that January production would be about 10.2 million b/d which translates into a cut of 900,000 b/d from November's 11.2 million b/d. We believe Saudi Arabia’s production baseline under the cut extension is about 10.2 million b/d.
OPEC is not expected to provide a country-by-country table of production baselines today but we strongly believe it to be a credible commitment to make cuts. The cuts are described as being up to 3 percent for each participating producer from an October baseline but Kuwait was adhering to a September baseline. Russia is expected to cut about 200,000 b/d.
The production cut agreement is for the first six months in 2019 with a review in April. It also appears that the next OPEC meeting will be sooner than normal in April as well.
As for the Trump factor, OPEC, and Saudi Arabia in particular, have decided to make self-interested decisions on oil policy, as we summarized in our “OPEC to unfollow Trump oil tweets” note in November. However, while OPEC did not defer to Trump on his desire to keep supply steady, they did defer to Trump and other consumer countries in public comments by Minister al-Falih. Al-Falih even commented that US producers likely breathed a sigh of relief by OPEC’s decision as they are about to make capex decisions. At press time, there was no Trump tweet but OPEC will not be surprised to see one.
We will provide the table of cuts or our estimates of country-by-country cuts in a future note.
