Takeaway: Special March Meeting Now Scheduled to Enforce Compliance & Wait Out Trade Deal

Deeper Not Longer: OPEC Agrees to New Lower Quotas for 1Q2020 - oil bull cannon

VIENNA, December 6, 2019 – OPEC and its non-OPEC partners completed two days of meetings here in the Austrian capital with a new agreement to lower production quotas for the first quarter of 2020.  

The 500,000 barrels per day (b/d) in new quota production cuts increase the current collective cuts of 1.2 million b/d to 1.7 million b/d in the first quarter next year.

However Saudi Arabia has committed to additional voluntary cuts above the new quota resulting in a new 2.1 million b/d production cut quota, according to Saudi oil minister HRH Prince Abdulaziz bin Salman.

Prior to the OPEC press conference this afternoon, we tweeted that we expected an even deeper cut that 500,000 b/d.

 Deeper Not Longer: OPEC Agrees to New Lower Quotas for 1Q2020 - IMG 2112

Due to Saudi Arabia’s voluntary over-compliance in the new deal, OPEC’s decision here translates into real production cuts instead of paper-only cuts as suggested in media reports. 

The new lower quota and voluntary cut commitments from OPEC leader Saudi Arabia only comes in exchange for commitments of better compliance under the new lower quotas from other producers.  Our sources tell us the that Saudi minister Prince Abdulaziz delivered some tough love to fellow delegates about the need for greater compliance to their commitments for Saudi Arabia continuing to bear the lions share of the cuts.

Indeed at the public opening of Friday’s joint OPEC and non-OPEC meeting, Prince Abdulaziz compared their work like religion “if we are believers, we also need to be practicing our beliefs.”  

To that end, OPEC has scheduled a special full OPEC and Non-OPEC ministerial meeting in March to review and enforce compliance under the new quotas.  It also was a concession to Russia that wanted to hold a sooner meeting than the regularly scheduled June meeting to reassess the market and the required production levels.

In addition, OPEC had ministers from Iraq and Nigeria attended the press conference to publicly commit to the new cut quotas in a pseudo-AA meeting for oil markets.

Some will see uncertainty regarding the OPEC policy after the March meeting but absent a US-China trade deal, we believe you will see another effort to rollover the deeper cuts for another quarter.  It is somewhat easy in the low-demand first quarter for Saudi Arabia to make additional cuts but becomes a little more challenging when demand picks up in the second quarter. 

Russia also won another concession it sought to exclude condensate production from its oil production for purposes of its compliance under the agreement.  Russia gave a number of 797,000 for November condensate production that should make their OPEC+ compliance quite easy going forward.

OPEC’s public relations department pledged to release a chart of the new production quota allotments, and we will publish a new note when it becomes available.

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