Despite President Donald Trump’s persistent calls for OPEC to not lower production, the 15-member oil cartel’s decision to reduce supply on Dec. 7 will ultimately be good for U.S. oil production, a senior oil market analyst told Hart Energy.
OPEC ended two-days of intense talks in Vienna, Austria, with the expected decision to reduce oil supply by 1.2 million barrels per day (MMbbl/d) beginning in January. The immediate response was that oil prices jumped 5% as Benchmark Brent crude oil rose $3.26 to a high of $63.32 early on Dec. 7 and U.S. light crude rose $2.62 to a high of $54.11 before slipping to around $53.90.
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After oil plummeted 30% two months ago, OPEC and non-OPEC members came together in hopes of stabilizing the oil market around the world and also in the U.S.
“They kind of get the best of both worlds because the U.S. is not a member of OPEC so U.S. producers produce at-will based on their budgets and individual company’s plan,” said Stratas Advisors, senior oil market analyst Ashley Petersen. “At the same time, they are going to benefit from price stability and price increases that come about from OPEC fighting off oversupply.
“They are in a very lucky spot right now. That’s really going to be the debate next year and moving forward— how long should OPEC be supporting these prices, at what point does prices change represent a change in global markets and that OPEC just needs to accept lower prices, or is it something that OPEC should continue to manage around.”
With uncertainty as to whether Russia and other non-OPEC members would go along with the supply reductions, prices continued to fall on Dec. 6. But with Russia agreeing to cut its production by 200,000 barrels per day (bbl/d) the market began to perk up. There was some uncertainty early Dec. 7 as nations like sanction-laden Iran sought a waiver against supply cuts.
Once countries such Iran and Venezuela were assured of waivers and Russia was fully onboard, OPEC was able to end a marathon two days of talks with an agreement that is closely in line with what most analysts predicted. There was speculation that the supply cut could have been as steep as 1.3 MMbbl/d, but the consensus seems to be that 1.2 MMbbl/d is a good landing spot for the next six months.
The OPEC producers agreed to cut supply by 800,000 bbl/d starting next month and the non-OPEC producers will reduce production by 400,000 bbl/d for six months beginning in January.
“This was a better than expected outcome because the highest range the market wanted to see was 1.3 MMbbl/d and this accounts for 1.2 MMbbl/d,” Petersen said. “They didn’t give as many exemptions as people thought they would. They really only gave exemptions to countries that both need them and are needed to grow production next year. Venezuela is not turning that around. So the fact that they have an exemption isn’t going to impact balances. So this definitely is positive for prices looking ahead to next year.”
The consensus among most analysts of the oil markets seemed to agree that the Dec. 7 reductions were ultimately good because it prevents over supply of oil. The immediate shift in the markets seemed to support their beliefs.
“It’s been an encouraging day for OPEC, with oil prices reacting positively to the outcomes of the conference,” said Florian Thaler, an oil strategist at UK-based OilX. “OPEC’s contemplated goal was to mitigate a 1.3 MMbbl/d oversupply, which has been achieved by the agreement of a 0.8 MMbbl/d OPEC and 0.4 bbl/d for non-OPEC allied nations, including Russia. Delegates also came to a consensus on the contentious issue of Iran—namely exemption of the country in the oil cuts, due to the current US sanctions.”
During a news conference on Dec. 7, OPEC said its main interest is to stabilize the market for both producers and consumers and to ensure the health and sustainability of the petroleum industry.
“Member countries remain committed to being dependable and reliable suppliers of crude and products to global markets,” the cartel said in a released statement.
Petersen said the impact on the consumer won’t be prohibitive and she says it could have a positive impact on the economy and jobs in the oil and gas industry.
“This isn’t necessarily bad news for consumers because this isn’t going to support $100 per barrel prices,” Petersen said. “This is just kind of putting a floor to what we have been looking for. It adds to stability in prices which is also important for consumers.
“While prices in some areas may go up a little bit or at least might stop falling it isn’t going to directly hurt consumers’ wallets. Then when you think about the economic impact of oil and gas operations for all it providing security to those jobs all throughout as well, which is good for consumers and future spending.”
But Stratus Advisors director Greg Haas did add caution to the reduction and the affects it could have on the global market.
“If implemented, the announced OPEC cuts should incrementally put the market in a tighter supply position than previously thought,” he said. “And if Alberta follows through on their unprecedented mandate to cut crude production by 325 Mbbl/d, then the willful removal of oil supply could top 1.5 MMbbl/d at the beginning of 2019. U.S. shale producers, still being chastised to keep spending within cash flow, likely cannot ramp production by similar barrels in similar timeframe.
“The market outlook is clearly tighter today than it was yesterday. The new fashion for tight supply is arriving as the months and quarters ahead lead up to the implementation of big demand side changes resulting from the sulfur-reducing rules known as IMO 2020.”
With Trump staunchly against the reductions in his Twitter rampages, he could lessen the cost increase on consumers by releasing U.S. reserves via an executive order, but Petersen does not believe that is the route Trump will take. The increases at the pump aren’t expected to be that significant.
How Trump reacts to Iran receiving a waiver from cutting oil production remains to be seen after he imposed sanctions on the country whose economy relies heavily on oil.
“Brent prices have only crossed back into the $60 range,” Petersen said. “We are still facing oversupply so to immediately release reserves would be a little too gung ho. There are questions about when the Iran waivers come up is he going to be as generous about granting those waivers because that has been a big part about what has been behind the volatility.
“OPEC ramped up production in October in advance of the November sanctions and then waivers were released in the last minute because OPEC was producing too much. Iran wasn’t going to fall as much as they had expected.
“So this could definitely factor into the calculus about who gets their waivers extended next year.”
Terrance Harris can be reached at firstname.lastname@example.org