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OPEC Data Suggest Deeper Supply Cut May Be Needed in Late 2019

Dec 12, 2018 by Grant Smith

Production cuts agreed by OPEC and its allies are on track to balance global oil markets in the first half of 2019, but more work may be needed after that.

If Saudi Arabia, Russia and other countries in the so-called OPEC+ coalition cut production by 1.2 million barrels day as promised for the first six months of next year, world supply and demand will be in equilibrium. However, booming U.S. shale supplies mean they would need to almost double the cutback to prevent a new surplus in the fourth quarter, a report from the group showed.

Oil prices remain stuck in a bear market, trading just above $60 a barrel in London, even though the Organization of Petroleum Exporting Countries and its partners surprised traders with the size of the supply reduction announced on Dec. 7. Traders remain concerned that record American oil production and shaky fuel consumption could foment a new glut.

“The agreed production cuts will not be enough to ensure sustained and immediate recovery in oil prices,” consultants at Oslo-based Rystad Energy AS said. “However, the decision does stand as a Christmas gift to budget-setters in the U.S. shale industry, where the relentless growth in production is set to continue also for the second half of 2019 and beyond.”

OPEC kept 2019 forecasts for global oil supply and demand mostly unchanged in its report, which is released each month by the group’s research department in Vienna. The organization trimmed estimates for the crude it will need to supply next year, by 90,000 barrels a day.

Production from outside OPEC, motored by U.S. shale drillers, is poised to expand by more than than global oil demand next year, at 2.16 million a day versus 1.29 million a day, the report showed.

The global surplus implied by the report during the first half of 2019, at about 1.28 million barrels a day, is in line with the reduction agreed by the cartel and its allies in Vienna last week.

However, the report indicates that world markets could tip into oversupply again during the second half of 2019. Even if they restrict supplies to the level agreed last week, there would still be a surplus of about 1 million barrels a day in the fourth quarter.

Supply Disruptions

Still, the report showed how unplanned supply disruptions within the organization could also limit the surplus, and ease the work required of other members.

As new U.S. sanctions took effect on Iran last month, the country’s production slumped below 3 million barrels a day for the first time in several years. Output from the Islamic Republic plunged by 380,000 barrels a day to 2.95 million in November, according to the report. U.S. officials have threatened to choke off Iranian exports entirely after President Trump quit a nuclear accord with the country in the summer.

Saudi Arabia has said it could reverse its pledge to restrain production in the event of a shortage, and data in the report reaffirmed its willingness to fill in any gap. The kingdom’s production increased by 377,000 barrels a day in November, rising almost exactly as much as Iran’s fell.

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