December 7, 2018 / 3:43 PM / 4 days ago

Analyst View: OPEC, allied exporters to cut crude output by 1.2 million bpd

(Reuters) - OPEC and its Russia-led allies moved closer on Friday to clinching a deal that would cut oil production by more than the market had expected despite pressure from U.S. President Donald Trump to reduce the price of crude.

The producer club will curb output by 0.8 million barrels per day from January while non-OPEC allies contribute an additional 0.4 million bpd of cuts, Iraqi Oil Minister Thamer Ghadhban said after OPEC concluded two days of talks in Vienna.

BACKGROUND:

This OPEC meeting has been more contentious than other recent get-togethers. The group has broadened its reach after it was able to reach an agreement with non-member Russia and other nations to cut production at the end of 2016.

That landmark deal shored up falling prices, pushing Brent crude at one point to more than $86 a barrel. Prices have since dropped almost a third since October, and Saudi Arabia, de facto leader of the Organization of the Petroleum Exporting Countries, has faced demands from Trump to keep prices lower.

MARKET REACTION:

Oil prices jumped on the news. U.S. crude futures CLc1 surged 4.5 percent to $53.77 a barrel while Brent crude LCOc1 rose 5.3 percent to $63.24 a barrel.

ANALYST COMMENTS:

ARTEM ABRAMOV, VICE PRESIDENT OF SHALE ANALYSIS WITH RYSTAD ENERGY, OSLO, NORWAY:

“It’s not very clear what kind of pricing this will eventually lead to. We’ll probably see over the next few months how OPEC and Russia follow through. I think overall the mood now is very positive.”

RANDY OLLENBERGER, MANAGING DIRECTOR, BMO CAPITAL MARKETS, CALGARY:

“While the agreement was expected, the 1.2 million b/d cut was slightly less than hoped for heading into the meetings; however, the cuts came in above the 1.0 million b/d suggested figure from delegate interviews over the past 24 hours. We view the agreement as positive for oil prices as well as oil-linked equities. Incorporating OPEC’s cuts into our supply and demand outlook, we anticipate a relatively balanced market in 2019 and 2020. The threat of a further escalation in the trade dispute between the U.S. and China could negatively impact demand; however, we do not believe that it will slow growth enough to result in surplus supply.”

ANN-LOUISE HITTLE, VICE PRESIDENT, MACRO OILS, WOOD MACKENZIE, BOSTON:

“The decision is likely to be met with support from some U.S. producers who were concerned that without a deal, WTI prices would fall further, possibly curtailing 2019 drilling activity.

“A production cut of 1.2 million b/d would tighten the oil market by the third quarter of 2019 and cause prices to rise back above $70 per barrel for Brent.

“It would help producers contend with the strength of U.S. supply growth in 2019 when we expect a year-on-year increase of 2.4 million b/d in non-OPEC production as U.S. supply continues to gain sharply.

“That compares to our forecast for oil demand to increase by just 1.1 million b/d in 2019, leaving little room for a significant increase in OPEC production next year and making a production cut necessary to stabilizes prices.”

JON ANDERSSON, HEAD OF COMMODITIES AT VONTOBEL, ZURICH, SWITZERLAND:

“Many are likely to take the recent OPEC meeting outcome as a bullish signal for crude oil in general. This harbors opportunities but also risks. This is because we might see a price divergence between the price of Brent and WTI and with it a widening of the spread between the two in the course of Q1 2019. Inventory levels in the Cushing area in the US could rise due to pipeline constraints which prevents oil supply being produced form reaching the main market. Should this happen, the price of WTI is set to underperform Brent. However, eventually this could be reversed if new pipelines resolve the congestion in the Cushing and Permian Basin areas towards Q4 2019.”

MICHAEL TRAN, COMMODITY STRATEGIST AT RBC CAPITAL MARKETS, TORONTO:

“While the 1.2 mb/d cut may lack the shock-and-awe factor that many in the market were hoping for, the strong show of unity at the press conference should stem the recent downward spiral and inject some renewed optimism into the market.”

SANDY FIELDEN, DIRECTOR OF RESEARCH IN COMMODITIES AND ENERGY AT MORNINGSTAR, AUSTIN, TEXAS:

“I think the 1.2 mmb/d is a little shy of convincing the market that the oversupply is under control. The devil is in the compliance and how the Iranian sanction waivers pan out in the next 6 months. They’ve done enough, but only just!”

ETHAN BELLAMY, SENIOR RESEARCH ANALYST, BAIRD, BOULDER, COLORADO:

“Only two-thirds of our list is up in response to the latest news, meaning a cut of at least 1 million likely was priced into midstream stocks. 1.3 million was probably the best case, so 1.2 million is fairly positive. The moves are mostly lagging the 3.5-4% move in the crude oil strip, suggesting investor caution about trust in crude oil price stability or follow through with the cuts.

“Statements are one thing. Compliance is another.

“U.S. production likely continues to grow at current price levels. The USGS assessment of the Permian at 46 billion barrels of recoverable reserves reinforced our domestic oil bounty. We have no shortage of resource. Full cycle lifting costs, infrastructure, global demand, and policy will govern the call on U.S. crude oil, not geology.”

BILL FARREN-PRICE, DIRECTOR, RS ENERGY GROUP, LONDON:

“The scale of the cuts is more or less in line with our expectations although the credibility of the new deal will only be judged by the extent to which OPEC+ offers metrics by which the market can judge delivery in 2019. 

“The Iran sanctions and subsequent waivers remain one of the largest moving parts. Until the US plans for those sanctions becomes clearer, it will be difficult for producers to set policy appropriately.

“This deal on the face of it looks like a holding strategy, aimed at stabilizing Brent above $60. As ever, the devil is in the detail and we are not quite there yet.”

LUKMAN OTUNUGA, RESEARCH ANALYST, FXTM,

“A collective sigh of relief was felt across oil markets after OPEC+ delegates successfully reached an agreement to cut production by 1.2 million barrels per day. OPEC nations have agreed to trim production by 800,000 barrels while non-OPEC members will handle the remainder.

“This breakthrough in talks is a welcome development for financial markets and is seen supporting risk sentiment during the upcoming trading week. With OPEC agreeing to cut oil production larger than initially expected, oil prices are poised to extend gains in the short term. However, the medium- to longer-term outlook remains open to question. It must be kept in mind that U.S. Shale production remains as robust as ever while concerns over slowing global growth are fuelling fears of falling demand for oil. If escalating US-China trade tensions evolve into an all-out trade war, oil markets will certainly be one of the many casualties.

“Although WTI Crude staged a solid rebound following the OPEC production cut, bulls have a long way to go before reclaiming back any sort of control. A weekly close above $54.00 is seen opening a path towards $56.00 and $57.40 in the short to medium term.”

BERNADETTE JOHNSON, VICE PRESIDENT, MARKET INTELLIGENCE, DRILLINGINFO, DENVER:

“The news about OPEC cutting is obviously impacting prices... but it was necessary because of US production growth and the increasing market impact of US crude globally. It used to be the oil markets really marched to the beat of the same drum, and that was OPEC, but more and more the US is disrupting that, and the U.S. cannot be stopped because of the many companies that make up our market rather than a state-owned company.”

NEIL ATKINSON, HEAD OF THE OIL MARKETS DIVISION, INTERNATIONAL ENERGY AGENCY, PARIS:

    “If prices do settle above where they did yesterday, that will be welcome to oil producers because they’re not only looking to maintain profitability, they also see it as a signal to invest in more capacity for the future. Many have already hedged for 2019, so in some respects it may not make a big difference to them. The bottlenecks aren’t going away overnight.”

ROBERT MCNALLY, PRESIDENT, RAPIDAN ENERGY GROUP IN WASHINGTON:

“Relative to how big this looming supply tsunami is, the cut is not nearly enough to prevent big inventory builds next year. President Trump and President Putin prevented OPEC+ from cutting by more, which was certainly needed to put a sturdy floor under prices. They are putting a fuzzy floor under prices.”

ASHLEY KELTY, OIL & GAS RESEARCH ANALYST, CANTOR FITZGERALD EUROPE:

“The supposed cut of 1.2 million bpd by OPEC+ is larger than some had expected, although still some way off what is really required to bring the market back into balance.

“However, the real issue is the details of the baseline point from which the new quotas are set, given the Saudis increased production significantly last month. If it is on current production levels, then the net impact for the Saudis is in reality negligible relative to what they were producing before prices slipped from $80 highs. Consequently, it is hard to say what the long-term impact will be. Our initial snap judgment is that prices will stabilize in the $60-65/bbl range, as the cuts are likely to be insufficient to stem the near term supply glut, given U.S. output is continuing to rise (albeit at a slower pace due to capacity constraints).

“It feels like a bit of a fudge, and the absence of the final communique at this late stage suggests that a lot of horse trading has been underway to reach a situation that tries to appeal to all parties, whilst ending up with a situation that will appease no-one.”

SAMEER PANJWANI, ANALYST AT INVESTMENT FIRM TUDOR, PICKERING, HOLT & CO., HOUSTON:

“The biggest thing it provides is a lot of clarity for U.S. independent upstream producers going into budgeting season for 2019. The biggest concern has been that a lot of these operators are not going to be disciplined about how they spend capital in 2019 and prioritize growth over generating free cash flow. The announcement provides a baseline of support of oil between $50 and $55. That’s a decent level for U.S. independents.”

KIRILL TACHENNIKOV, SENIOR OIL AND GAS ANALYST, BCS GLOBAL MARKETS:

“We recognize the agreement reached as highly positive, as it outpaced the market expectations of 1 mmbd following the latest guidance. Now we think that with such limited supply we can see the opposite picture next year (i.e. oil deficit on the market) which may bring prices to a new maximum by mid-2019.”

JOHN KILDUFF, PARTNER, AGAIN CAPITAL MANAGEMENT, NEW YORK:

“The size of the production cut appears to be sufficient to bring some balance back to the market in the near-term. It had to be done, but the problem of steadily rising U.S. production and exports remains a big problem for the group. Still, with exemptions for Iran and Libya, the effectiveness of the accord may be rapidly undercut.”

FLORIAN THALER, OIL STRATEGIST, OILX PART OF THE SIGNAL GROUP, LONDON:

“It’s been an encouraging day for OPEC, with oil prices reacting positively to the outcomes of the conference. OPEC’s contemplated goal was to mitigate a 1.3 mln bpd oversupply, which has been achieved by the agreement of a 0.8 mln bpd OPEC and 0.4 mln 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.”

CARSTEN FRITSCH, COMMERZBANK COMMODITIES ANALYST, FRANKFURT, GERMANY:

“This is slightly less than needed, but more than expected after yesterday. Oil prices have risen initially as a result.”

HARRY TCHILINGUIRIAN, GLOBAL OIL STRATEGIST, BNP PARIBAS, LONDON:

“(A cut of) 1.2 million bpd, if implemented promptly and fully, should be enough to largely attenuate, but not eliminate, expected implied global inventory builds in the first half of next year.”

Reporting By David Gaffen; Editing by David Gregorio

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