Abu Dhabi, UAESaturday 7 December 2019

Opec agrees to extend cuts for nine months amid demand concerns

Oil price reaction was lukewarm with Brent trading at $65.41 at 10.50am UAE time

A nine-month extension of production cuts is 'unequivocal' according to Saudi energy minister Khalid Al Falih. Victor Besa / The National
A nine-month extension of production cuts is 'unequivocal' according to Saudi energy minister Khalid Al Falih. Victor Besa / The National

Opec+, the alliance headed by Saudi Arabia and Russia that is undertaking crude production cuts since January, formally agreed to extend restrictions until March, as the group anticipates a resurgence of US shale.

"The commitment to a nine-month extension is very strong, and an extension is unequivocal," Saudi Energy Minister Khalid Al Falih said in Vienna on Monday.

While a rollover was imminent after an agreement between the Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin on the sidelines of the G20 summit in Osaka on Saturday, the consensus to implement the current drawdown of 1.2 million barrels per day into 2020, is in expectation of declining global demand for crude.

"The longer extension is an attempt by Opec to get ahead of the market and weakening demand forecasts for next year,” said Joe McMonigle, senior energy analyst at Hedgeye Risk Management.

"It’s a smart move that likely puts a floor on prices, absent a major stumble in the global economy. It’s also a low-risk strategy since Q1 is typically a low-demand period, and Opec can revisit the policy at its next regular meeting in six months' time in December,” he added.

Oil price reaction was lukewarm with Brent trading at $65.41 at 10.50am UAE time, as markets cautiously assessed the implications of the extension for the near term. A slew of disappointing manufacturing reports from the US, China and Europe also undermined faith in oil demand. Trade concerns resurfaced after Washington proposed more tariffs on EU goods in retaliation against European aircraft subsidies.

Oil has gained about 15 per cent since mid-June as tensions escalated in the Middle East and on signs of progress in resolving the US-China trade war. Market watchers including the International Energy Agency have revised down forecasts for demand amid sluggish growth in China and India.

The 14-member Opec and 11 non-member allies have been in a pact to manage supply at a historic accord in Algiers in 2016. A surge in shale production, which has since propelled the US to become the world’s top producer of crude, has led to a build-up in stockpiles, which the producers have been looking to siphon off from the market.

Compounding the oversupply in the markets has been the slowing demand from China, which nearly reached its target for tanking up its strategic petroleum reserves.

The world’s largest energy importer has been taking advantage of the lower crude prices to build up reserves to last three months in the event of a supply outage in the markets.

However, Beijing’s move towards cleaner forms of energy as well as the nearing of its target levels are worrying the markets, which could see even lower demand once China has sufficient stockpiles to ensure energy security.

The biggest concern for the markets is the continued ceding of ground to US shale. A nine-month supply reduction would leave room for shale producers to increase their supply and eat into Opec’s existing market share.

At their meeting in Vienna on Monday, Opec and allies, also decided to formalise their existing co-operation into a charter.

The institutionalisation of the working framework between Opec and non-members has been in the works since 2017. However, producers have yet to move ahead with the creation of a super-group. Vocal opponents of such an accord include Iran, which has questioned the unilateral nature of the group’s recent decision making and has vowed to veto it.

Updated: July 2, 2019 12:34 PM